Criminal Debt Not Dischargeable in D.C. Chapter 7 Bankruptcy

Filing for a Chapter 7 bankruptcy in D.C. can help to ameliorate your financial standing by freeing you from unmanageable debt.

This includes past-due medical expenses, credit card balances and personal loans.

However, there are a handful of debts a Chapter 7 filing will not allow you to discharge. Perhaps most commonly cited among these are student loans, but also included are orders for criminal restitution. For some, this is of key importance because it may be the primary reason they seek bankruptcy protection.

Understanding how a bankruptcy can – and cannot – help is critical before initiating a proceeding. The debtor in the case of Behrens v. U.S. , recently reviewed by the U.S. Bankruptcy Appellate Panel for the Eighth Circuit, may have learned this lesson the hard way.

Back in January 2008, the debtor was sued by the U.S. Securities and Exchange Commission for a Ponzi-like scheme in which he reportedly bilked about 20 senior citizen investors out of some $6.5 million. Little more than half of that he was accused of misappropriating for personal use, including renovations to his two homes, the purchase of luxury vehicles and the transfer of money to another venture he owned.

He was ultimately part of a consent judgment that required him to pay restitution to those investors.

As a result of that investigation, he was indicted on federal criminal charges and in late 2011, convicted, sentenced to five years in prison and ordered to make restitution.

The debtor alleges that the restitution order in the criminal case was a duplicate of those listed in the civil case.

Then last year, he filed a pro se petition for relief through a Chapter 11 bankruptcy, though that was later dismissed and then reinstated as a Chapter 7. (Pro se means he filed the petition without the assistance of a bankruptcy attorney, who might well have advised him that he was filing for the wrong type of bankruptcy, saving him a fair amount of time.)

Then in the course of the bankruptcy, the debtor filed an adversary proceeding against the federal government. Here, he alleged that the federal criminal court’s restitution order was invalid and should be voided or discharged in the course of the bankruptcy.

He contended that the federal government’s continued efforts to collect restitution from him, despite his bankruptcy filing, violated his right to an automatic stay. He also argued that the judgment against him had been unfair.

The bankruptcy court dismissed his adversary complaint for failure to state a claim upon which relief could be granted. The appellate bankruptcy court affirmed, essentially holding that collateral attacks against a previous criminal judgment can’t be launched in bankruptcy court.

Beyond this, however, it’s been well-established that criminal restitution payments can’t be discharged in a bankruptcy filing.

The 2010 case of In Re Paul Chayne Williams spelled this out rather clearly. In that case too, the debtor was a man convicted of a white collar crime. He had characterized a particular debt to an individual as a “loan,” and it was discharged by the court.

However, a subsequent criminal investigation revealed that this exchange was actually the result of fraud, for which he was convicted. The creditor then sought restitution for the debt, which the debtor argued had already been discharged. The bankruptcy court ruled that the creditor could collect.

If you have questions regarding whether your debts may be dischargeable, we are here to help.

Contact the Bankruptcy and Debt Relief Law Firm of Harris S. Ammerman. In Washington, D.C., call (202) 638-0606. In Maryland, call (301) 890-4500. In Virginia, call (703) 550-7030.  

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