Today we have a guest post from Jay S. Fleischman, a great consumer bankruptcy attorney who is a member of the National Association of Consumer Advocates, a member of — and the New York co-chair of — the National Association of Consumer Bankruptcy Attorneys, and a partner in the New York law firm of Shaev & Fleischman, LLP.
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Let’s say you’re convicted of a crime. Your lawyer can get you jail time or criminal restitution, perhaps a mix of both. Here’s how to handle that restitution order using the U.S. Bankruptcy Code.
Bankruptcy is usually thought of as a way to get out of credit card debt, stop foreclosure, and the like. And though you can’t wipe out a criminal restitution order using the bankruptcy laws, you can leverage the system to repay that debt in a way that doesn’t interfere with your ability to earn a living.
Discharge of Criminal Restitution In Bankruptcy
Under 11 USC 523(a)(7), you cannot discharge a debt that is for a “fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty”. In other words, you can’t wipe out your criminal restitution obligation in bankruptcy. When you file for Chapter 7, which is designed to lead to a discharge of your obligations, you will still owe the criminal restitution when you complete your case.
Chapter 13 Bankruptcy As Repayment Tool
There is, however, a different type of bankruptcy case that is available to those who have regular monthly income. Under Chapter 13 bankruptcy you can repay a portion or all of your debts over a 3-5 year period. The amount you are required to pay each month under Chapter 13 is dictated by a combination of your income, expenses and debt, and the monthly payments go to a bankruptcy trustee for distribution to your creditors according to a legally-mandated formula.
Chapter 13 is an elegant way of reorganizing your financial life and structuring repayment in such a way as to minimize the impact on your day-to-day life. While you’re in an active Chapter 13 case the government cannot execute against your income or assets in connection with the restitution award, so you won’t need to worry about your paycheck or bank account being seized during this period of time.
If you’re in a Chapter 13 bankruptcy, however, you’re going to need to repay that restitution award in full because, as in Chapter 7, the claim won’t be discharged at the end of the case. That’s why it’s important to structure your Plan accordingly.
Order Of Repayment In Chapter 13
Debts get paid in a particular order under the U.S. Bankruptcy Code. The U.S. Bankruptcy code has at its core the policy of fairness to all creditors of equal legal priority. At the lowest priority of repayment stands the general unsecured claim, which includes credit cards and medical bills. § 507(a) of the U.S. Bankruptcy Code lists those debts that are entitled to priority over other unsecured debts. Although the list of priority claims includes certain type of debts that would also be nondischargeable, criminal restitution claims are not among those listed. In addition, the bankruptcy court can’t change the priority scheme established by the Bankruptcy Code.
If you file for Chapter 13, your repayment plan can’t attempt to repay your criminal restitution award before other general unsecured creditors except in extremely limited situations. In fact, the reported cases addressing separate classification of restitution claims have uniformly denied confirmation. See, e.g., In re Crawford, 324 F.3d 539 (7th Cir. 2003); In re Bowles, 48 B.R. 502 (Bankr. E.D. Va. 1985); In re Williams, 231 B.R. 280 (Bankr. S.D. Ohio 1999); In re Limbaugh, 194 B.R. 488 (Bankr. D. Or. 1996).
The Ever-Lasting Chapter 13 Bankruptcy
If you owe money for criminal restitution, but you’re not going to be able to repay it during the course of a single Chapter 13 bankruptcy case, you may want to consider whether it makes sense to file one case, go through the entire repayment plan, and then file another one as soon as the first one is completed. This gives you the opportunity to restructure your finances over a longer period of time than would otherwise be possible in a single bankruptcy case.
There are going to be considerations once you complete your first repayment plan, such as whether your income is higher or lower than it was when you began your case. The second repayment plan will need to reflect your new income and expense levels, but for some it’s a valuable tool to help wrangle that restitution award into shape.
Jay S. Fleischman is a lawyer who helps people file Chapter 13 bankruptcy. He also sues harassing bill collectors on behalf of his clients.
Image credit: stevendepolo
