Are fines or punitive damages for fraud discharged in bankruptcy?

If you are found liable for fraud, you may end up facing fines (statutory penalties) as well as punitive damages. If you cannot pay those damages, you may wish to try to discharge them in bankruptcy. This is not an option, however, since the bankruptcy code will not permit you to discharge any penalties for fraud.

What Cannot Be Discharged Under Bankruptcy Fraud Rules

Under federal bankruptcy rules, you may not discharge:

• The actual value of the “money, property, services, or . . . credit” obtained through fraud, nor 
• The punitive damages and attorneys fees related to the fraud. 

The Rules for Fraud in Bankruptcy

The rules for discharging fraud penalties in bankruptcy were made clear in a March 25, 1998 decision of the Supreme Court of the United States in Cohen v. de la Cruz. 

The case involved a landlord who had overcharged his tenants. The trial court found that the landlord had committed “actual fraud” within the meaning of the Bankruptcy Act and that his conduct amounted to an “unconscionable commercial practice” under New Jersey’s Consumer Fraud Act. As a result, the court awarded the tenants treble damages plus reasonable attorney’s fees and costs.

The debtor recognized the approximately $30,000 in improperly charged rent would not be dischargeable, but argued that he should not be stuck having to pay the $100,000 in punitive damages and attorneys’ fees the court awarded. The court decided those extra damages had been awarded as a result of his fraudulent acquisition of “money, property, services, or . . . credit.” All the debtor’s obligations arising out of fraudulent conduct, including both punitive and compensatory damages, were not eligible for discharge in bankruptcy.

Getting Help

While bankruptcy can provide you with a viable option for restructuring and eliminating most debts, not all debts can be handled through a bankruptcy filing. Before filing for bankruptcy, you will want to speak to a lawyer to ensure that the bankruptcy will help you to resolve the particular financial problems you face.