If one of your creditors got a judgment against you in a State Court action, you can still discharge that debt in bankruptcy – if it is of the dischargeable variety.
When a debtor files for bankruptcy protection, the long term goal is, of course, freedom from debt. Unfortunately, not all debts are dischargeable in bankruptcy. Determining which debts are dischargeable depends on which chapter of the Bankruptcy Code the debtor uses to obtain relief.
I. Chapter 7
Chapter 7 is the chapter most commonly used by individuals and married couples to deal with overwhelming debt. It affords sweeping relief: dischargeable debts are typically wiped out without the debtor making any payments at all.
The debts that are not dischargeable in a personal Chapter 7 bankruptcy are listed in 11 U.S.C. § 523(a). The list is quite long and has 21 entries. However, for most people there are fewer that are potentially problematic. They include:
- Most tax liabilities (11 U.S.C. § 523(a)(1)),
- Fraud debts (11 U.S.C. § 523(a)(2)),
- Breach of fiduciary duty debts (11 U.S.C. § 523(a)(4)),
- Domestic support obligations (11 U.S.C. § 523(a)(5)),
- Willful and malicious harm debts ((11 U.S.C. § 523(a)(6)),
- Fines (11 U.S.C. § 523(a)(7)),
- Student debts (11 U.S.C. § 523(a)(8)),
- Harm caused in a DUI ((11 U.S.C. § 523(a)(9)),
- Debts incurred to pay taxes (11 U.S.C. § 523(a)(14) and (14A)),
- Debts assigned in a divorce decree (11 U.S.C. § 523(a)(15)), and
- HOA dues incurred after filing a bankruptcy (11 U.S.C. § 523(a)(16)).
By the way, the list just given was provided in a kind of shorthand fashion. If you want a more complete statement of each read the cited portions of the Bankruptcy Code.
Section 523(c) of the Bankruptcy Code provides that the types of debts listed in 11 U.S.C. § 523(a)(2) (fraud), (4) (breach of fiduciary duty), and (6) (willful and malicious harm to a person or property) are dischargeable in a Chapter 7 unless the creditor in question successfully prosecutes a special kind of lawsuit – called an adversary proceeding – in the Bankruptcy Court. Successful prosecution means that the judge assigned to the case issues an order declaring the debt in question to be non-dischargeable.
Suppose the judgment your creditor obtained in State Court was based on a claim of fraud, or breach of fiduciary duty, or willful and malicious harm to a person or property. Based on 11 U.S.C. § 523(c) that creditor must still successfully prosecute the adversary proceeding in the Bankruptcy Court. However, that is not a particularly onerous burden because the creditor can ask the bankruptcy judge to apply the legal doctrine of res judicata to the State Court judgment to conclude that the debt is non-dischargeable.
On the other hand, if your creditor obtained a State Court judgment based on some other cause of action – for example, breach of contract – the debt will still be dischargeable in bankruptcy because the underlying debt is dischargeable.
In sum, the only kinds of debts that are non-dischargeable in a Chapter 7 bankruptcy are those listed in 11 U.S.C. § 523(a). If the underlying debt in question is not of the type listed in that subsection, then the debt is dischargeable in Chapter 7 regardless of whether your creditor got a judgment against you.
II. Chapter 11
It is the rare personal bankruptcy that is filed under Chapter 11 of the Bankruptcy Code because Chapter 11 is extremely expensive and very complicated. However, occasionally an individual debtor is ineligible for Chapter 7 and Chapter 13, so Chapter 11 is the only bankruptcy avenue available.
11 U.S.C. § 523(a) – the subsection discussed in some detail above – applies to individual debtors in a Chapter 11. Therefore, everything stated in the Chapter 7 discussion above applies, mutatis mutandis, in the Chapter 11 context.
III. Chapter 13
There are two ways a debtor can receive a Chapter 13 discharge:
- Completing the multi-year partial debt repayment Chapter 13 plan (11 U.S.C. § 1328(a)), and
- Obtaining a hardship discharge after completing enough of the plan to satisfy certain statutory requirements (11 U.S.C. § 1328(b)).
11 U.S.C. § 523(a) – the subsection discussed in some detail above – also applies to Chapter 13 hardship discharges. Therefore, everything stated in the Chapter 7 discussion above also applies, mutatis mutandis, in the Chapter 13 hardship discharge context.
As for the discharge issued upon Chapter 13 plan completion, the list of non-dischargeable debts is shorter. That list is given in 11 U.S.C. § 1328(a). Four notable differences include the following debts which are dischargeable upon plan completion:
- Debts that are the result of willful and malicious harm to property (but not to a person),
- Non-criminal fines,
- Debts incurred to pay a non-dischargeable tax, and
- Debts assigned in a divorce decree.
Once again, unless the underlying debt is non-dischargeable, the fact that your creditor obtained a State Court judgment against you does not render the debts non-dischargeable.