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When Debts Are Not Dischargeable in Bankruptcy

Aug. 11, 2020

When you file bankruptcy you want to know which debts are dischargeable and it's a fundamental part of the process. But some debts are inherently not dischargeable. When debts arise out of misappropriation of funds from your employer, outright fraud, and for personal use, obviously these are not dischargeable.

The facts of the case in, In re Kahn, alleged that the debtor worked for a land developer. The debtor's job was to sell property lots to prospective homeowners. The debtor completed a number of transactions using his employers funds to include misappropriation of cash, real property and even stock. Apparently too, the debtor emptied his employer's bank account of $340,000 from sales of lots. Then the debtor printed a "stock certificate" purchasing the company's stock, in his own fake company, and cancelling the real stock owner. Thereafter, the debtor claimed to be president of his employer's company, and signed and recorded a warranty deed conveying the entire corporation's subdivision to the debtor's fake company.

The employer found out about all the transactions and fired the debtor. Then the employer sued the debtor for theft, for sanctions, for a loan to shareholder and damages to employer's lost property.

The debtor filed Chapter 7.

What the court said:

In this case, 11 USC 523(a)(4) does not discharge or relieve the debtor for "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." The presumption of fraud and a breach of fiduciary capacity is is rampant in this case. The debtor was also liable, under 11 USC 523(a)(6) "for willful and malicious injury by the debtor to another entity or to the property of another entity."

Consequently these debts are not dischargeable in bankruptcy. Debts likely to be discharged in bankruptcy include consumer debts such as credit card debts, medical bills, lawsuit judgments which are unlike the above case, personal loans, obligations under a lease or another contract, and other various unsecured types of debts or loans that were given without collateral required.

This blog is intended for information purposes only and does not establish legal representation or financial guidance.