Filing for bankruptcy does not necessarily discharge every type of debt. Criminal fines and penalties based on a theft crime like embezzlement will stay on a debtor’s record whether they file under Chapter 7 or Chapter 13, even if they have no assets. The situation may be different if the debt is based on a civil judgment arising from the debtor’s allegedly fraudulent actions. In this case, the creditor has the burden of proving that the debt should not be discharged in the bankruptcy proceeding. A judge will determine whether the debt can be discharged. If the judge rules against the creditor, the debt will be wiped out with the debtor’s other dischargeable debts.
Someone who owes a debt based on a case that might involve embezzlement, fraud, or a similar type of misconduct should make sure to consult an attorney. They can provide specific advice on how to get this type of debt discharged to the extent possible.
A creditor must act soon after the debtor files for bankruptcy to prove that a certain civil debt falls within the appropriate definition. This consists of debts “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” A debtor filing for bankruptcy will need to appear at the Section 341 meeting of creditors, and the creditor must initiate an adversary proceeding within 60 days of the first day scheduled for this meeting. An adversary proceeding is essentially a type of lawsuit within the bankruptcy proceeding.
Overall, a creditor has about 90 days to bring the adversary proceeding, since the meeting of creditors usually is scheduled about 30 days after the debtor files the bankruptcy petition. The creditor has a right to seek an extension of time to bring the lawsuit, but only within the first 60 days after the debtor files the petition.
A debt will be non-dischargeable under the applicable section of the bankruptcy code only if the court finds that all three elements of the creditor’s case are satisfied. First, the debtor must have held property in trust for someone else, which could be an individual like a family member or an entity like the debtor’s employer. Second, the debtor must have taken the property and used it for a purpose that the property owner did not permit. If the debtor can show that the owner told or allowed them to use the property as they did, the creditor cannot prove this element.
Finally, the court must conclude that the circumstances in the case suggest that fraud occurred. This is a relatively vague element, but fraud often involves misrepresentations or omissions that cause a loss to a victim. For example, a court likely would find that fraud had occurred if the debtor appears to have lied to the property owner or concealed a key part of their actions, and they gained a benefit as a result. If the court finds that fraud occurred, and the debt cannot be discharged, this ruling will apply to any future bankruptcy filing by the debtor.
