Criminal Fines, Fees and Restitution Are Never Discharged in Bankruptcy, Right?

Posted by Kevin on June 20, 2012 under Bankruptcy Blog | Be the First to Comment

If you’ve heard otherwise you might actually be hearing correctly—especially about restitution—but most likely you’re reading or listening to information that’s now a couple decades outdated. For a long time criminal fines and restitution have not been able to be discharged under Chapter 7, BUT until the early 1990s criminal restitution COULD be discharged under Chapter 13. In fact, a 1990 United States Supreme Court opinion, Pennsylvania Dept. of Public Welfare v. Davenport, clearly stated that criminal restitution was dischargeable under Chapter 13, based on the language that Congress had used in the Bankruptcy Code. However, in direct reaction to that Supreme Court opinion, Congress quickly amended Chapter 13 to make clear that criminal restitution could not be discharged. A few years later Congress tightened up the law again, this time to say that criminal fines could not be discharged under Chapter 13 either. So ever since then the law about this has been quite clear.

But still, complications can arise.

Take the situation where the same conduct by a debtor can result in either civil or criminal liability, or both.  Usually, you can figure out very quickly whether the fine is civil or criminal, dischargeable or not.  Everybody’s favorite example is OJ Simpson. Remember he was acquitted of murder on the criminal side, but then was held liable for wrongful death in the civil lawsuit against him.

But every once in a while, whether an obligation is a criminal fine or instead a civil penalty might not be so clear.  If you own an auto repair shop and the state water quality agency fines you for illegal disposal of waste fluids, that obligation may be a criminal or civil one.

Or in some rare cases under Chapter 13, even some obligations arising directly from a criminal court’s judgment might be considered not to be “restitution, or a criminal fine,” and so can be discharged. That’s because even though Congress tried to “fix” the problem tossed in its lap by the Supreme Court’s Davenport opinion referred to above, it utilized language that was not precise enough and offered a little wiggle room.

Here is real life illustration of this—although I must warn that this may or may not be the way our local bankruptcy courts would interpret the law. The case is worth mentioning to show how courts wrestle with—and can disagree about—these kinds of issues.

A guy named Joseph Elliott Ryan was convicted in Alaska of the federal crime of possession of an unregistered firearm. He did nearly 5 years of prison time and paid a $7,500 criminal fine. But his criminal conviction also included obligations to pay $750,000 in restitution and $83,420 for “costs of prosecution.” On appeal, this huge restitution obligation was overturned and eliminated. He then filed a Chapter 13 case in Idaho and included his remaining obligation for the “costs of prosecution.” When his Chapter 13 case was completed, he had paid less than $3,000 of that $83,420 obligation. But he asked the bankruptcy court to order that the remaining $80,000 or so be discharged. The court refused, saying that “costs of prosecution” are a “criminal fine” excluded from discharge under Chapter 13.

But the bankruptcy court was overturned on appeal, and so that $80,000 “costs of prosecution” obligation was discharged.  The appellate court carefully analyzed the meaning of the term “criminal fine” as used in this context and elsewhere, and concluded that this term does not include “costs of prosecution.” It did not matter to the the appeals court that the “costs of prosecution” had been part of a criminal court’s criminal sentence.  So Mr. Ryan did not have to pay any more or that criminal court obligation, and was completely debt-free.

To be clear, just about all criminal fines, fees, and restitution CANNOT be discharged under either Chapter 7 or 13. But as Mr. Ryan’s unusual case illustrates, there can still be limited exceptions. In his case, for less than 5 cents on the dollar, and as a result of some smart lawyering, he got a bankruptcy discharge of a criminal court obligation.