Discharge, and Government Penalties

IS A GOVERNMENTAL PENALTY SUBJECT TO DISCHARGE?

There is no doubt that what is subject to discharge and what is not is highly debated and litigated in bankruptcy court and in the academic world. It is largely true that what Congress says and what it intends are highly debated and litigated in not just bankruptcy related matters but in all courts and academic circles. It only stands to reason that discharge of debts, what is and is not subject to discharge is a very important topic.

Chapter 7 Discharge and Chapter 13 discharge are two different animals. In a recent Eastern District of Michigan adversary case Michigan Unemployment Insurance Agency v Priscilla Andrews (Adv # 15-04724, lead bankruptcy case # 15-) which has been appealed by the Agency, Bankruptcy Judge Mark Randon, ruled that in a chapter 13 the Agency's quadruple damage penalty was dischargeable in chapter 13 under 11 USC Sections 523 (a)(2)(A) and (a)(7).

The debtor filed a chapter 13, and listed the debt, and the Agency filed an adversary complaint to determine whether the debt was dischargeable. The debtor filed her motion to dismiss the complaint. The nature of the complaint centered around an alleged over payment by the Agency saying that she intentionally failed to report wages. The over payment was $6,897 and with penalty and interest ballooned to over $34,000.

Under chapter 13 all debt is discharged except those which fall under 11 USC Section 1328 (b), or what is unofficially known as a hardship discharge where a motion is filed with the opportunity for a hearing requesting a discharge, even though, certain aspects of the confirmed plan have not been met. As long as the chapter 13 is not discharged under (b) reasoned the Court, then the penalty and interest are subject to the chapter 13 discharge under the “super discharge” theory set for in Section 1328 (a)(2); the Court looked to this list as exhaustive, and if Congress intended for this debt to be excepted from discharge, it would have listed it.

Stay tuned, as the appeal process unfolds.