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Exceptions to Discharge

Admin on July 17, 2017 Posted in Blog, Types of Debt in Bankruptcy

Imagine that Mike is driving his car on the highway. Mike is in a rush because he is late to his son’s graduation. In his haste, Mike accidentally cuts off Steve while Steve is trying to change lanes. This causes Steve’s car, which is a brand new Ferrari, to go out of control and slam into the concrete divider. A subsequent investigation finds Mike responsible. The parties head to court, where a judge orders Mike to pay Steve $80,000 for the Ferrari.

Imagine this scenario: Mike and Steve live next door to each other and have been neighbors for several years. Steve, a successful businessman, buys a Ferrari and parades it around the street. Whenever Steve passes Mike, Steve makes sure to drive slowly so Mike will stare at the car. Mike finds this to be annoying. Because Steve has a Ferrari, he insists that his wife park her Camry in the street so everyone who passes by will see the Ferrari. What’s more, Steve does not want any car parked in the street that blocks any view of the Ferrari so he tells his wife to park her Camry in front of Mike’s house. She parks her car in front of Mike’s house and blocks the mailbox. This infuriates Mike, who tells Steve not to block his mailbox. Steve dismisses Mike’s numerous requests.

Mike, who is infuriated by Steve’s behavior, gets up one morning at 3 am and keys the Ferrari. Mike also slashes the tires and makes a number of dents. A few hours later, when Steve goes outside to see his prized Ferrari, he breaks down crying because someone vandalized his car. Eventually, Steve hires a lawyer who gets a hold of surveillance video from the street. There is also video from Steve’s alarm company. Steve sues Mike, believing that Mike is responsible. At trial, expert testimony reveals that the man vandalizing the car was likely Mike. The testimony was based on Mike’s physique, arm movements, key scratches matching keys to Mike’s house, and clothing that fit Mike. There is also testimony from neighbors saying that Mike did not like Steve’s behavior and about an issue with blocking the mailbox. In considering the evidence, the jury ruled in favor of Steve and obligated Mike to pay for Steve’s car to the tune of $80,000.

Imagine: Mike is having difficulty making ends meet. He works hard and brings in income, but not enough to satisfy his lifestyle. On the outside, his middle class lifestyle seems nice: He has a small but well-kept house, tasteful landscaping, and once a year takes a two-week European vacation. However, debt is piling up. Instead of foregoing the European vacation, which has become a family summer staple, Mike decides to bilk the U.S. and state government out of funds. Mike applies for Medicaid coverage, which is both state and federally funded, and for food stamps, which is a state-funded program. While Mike’s income exceeds the maximum for both programs, Mike intentionally underreports his income to qualify. Mike’s application is accepted and he starts receiving benefits, allowing him to live his lifestyle comfortably while he is able to start repaying credit card debt. This arrangement lasts for over 10 years.

The Medicaid and food stamps offices conduct audits of their beneficiaries and present those findings to the local prosecutor’s office. The prosecutor’s office reviews Mike’s file and other documents, which suggest a discrepancy. The prosecutor obtains a warrant for Mike’s arrest. One the day the police are planning the arrest, Mike arrives home from his European vacation charged and excited. Then, the police knock on Mike’s door flashing an arrest warrant. The police take Mike and book him for welfare fraud.

Before trial, Mike agrees to a plea deal with the prosecutor wherein Mike will admit that he falsified records in return for no jail time. The plea deal calls for the prosecutor to request criminal restitution, or repayment, of the funds that Mike was not entitled to while the prosecutor will request that Mike not serve any jail time. At a hearing, Mike admits to wrongdoing and the prosecutor requests that Mike only be required to pay criminal restitution. The judge accepts and orders Mike to pay criminal restitution of over $800,000.

In all three scenarios, Mike is unable to pay the judgment. Is bankruptcy an option?

Section 521

Section 523 of the Bankruptcy Code excepts intentional torts and criminal restitution from discharge. While Mike can use bankruptcy to discharge some or all of the amount of an unintentional tort, he cannot use bankruptcy to discharge his debt for keying the Ferrari (an intentional tort) or repayment of welfare funds (criminal restitution).

In debt? Bankruptcy may be right for you. Contact the debt relief firm of Melanie Tavare.

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