Honesty in Bankruptcy

The U.S. Bankruptcy Court’s website emphasizes the point that the bankruptcy process is a way for the “honest” debtor to get out of debt. To that end, the United States Bankruptcy Code, or the Code, establishes parameters for what type of debt is dischargeable in bankruptcy.

Section 523(a) of the Code specifically cites certain debts that are non-dischargeable in bankruptcy. Among those debts are debt due to embezzlement and larceny. If a person is in debt because he or she embezzled money from his or her employer, then bankruptcy will not work to get out of that debt.

The Aviles case from here in the Northern District of California is an interesting read with respect to discharge for debt arising out of embezzlement. The case was initially filed in the Bankruptcy Court and was appealed to the District Court.

The Aviles Case

Nelli Markesheku worked for a tech company in Northern California and embezzled thousands of dollars. She would write checks in the name of Marvin Aviles, her partner, and mark them as payment for something else in the company’s books. The checks tended to be between $2,000 and $3,000.

Records show that Nellie and Marvin paid off a car loan of $21,000 and purchased a BMW. They made considerable renovations to their home. At a certain point, the company did an audit of its books and found a trail of checks leading to Nelli and Marvin.

The Company sued Nelli and Marvin for embezzlement and demanded a repayment of funds. In response, Nelli and Marvin filed for Chapter 13 bankruptcy.

Chapter 13 bankruptcy is called the “wage earner’s” bankruptcy because one aspect of eligibility is that a petitioner must be earning a wage. Per their petition, Marvin and Nelli showed a combined income of slightly more than $8,000 a month before taxes. Nelli admitted to embezzlement and agreed that her bankruptcy petition should not discharge her embezzlement debt. In contrast, Aviles did not claim embezzlement because he claimed to have no knowledge of the money’s source.

At trial, Nelli agreed to repay a certain amount of embezzlement-related debt during the Chapter 13 plan, which usually lasts for five years. She asked the court to agree to let her pay the amount based on her budget. There was a question, though, regarding how much Nelli embezzled: She claimed the amount was approximately $167,000 and half would be Aviles’s obligation, whereas her company claimed that it was over $500,000.

On appeal, the District Court ruled that Aviles was not guilty of embezzlement and could therefore discharge his part of the money taken from the company. The Court reasoned that the company did not prove by a preponderance of the evidence that Aviles knew or should have known about the illegal source of the money.

In general, a joint bankruptcy filing will have the same rules for both individuals filing for bankruptcy. This case was different.

Are you suffering from excessive debt? Bankruptcy might be right for you. Contact the law firm of Melanie Tavare, a Bay-area debt relief lawyer.