§ 8.17 — Criminal Problems

Revised: April 20, 2016

[1]

Chapter 13 is not a haven for criminals seeking to avoid their obligations to the state or to their victims. In 1990, Congress declared restitution included in a sentence on a debtor’s conviction of a crime to be nondischargeable upon completion of payments in a Chapter 13 case.1 The Bankruptcy Reform Act of 1994 added criminal fines as an exception to the full-payment discharge in Chapter 13 cases filed after October 22, 1994.2

[2]

Increasingly, however, when state criminal laws are used or misused to collect debts and when the outcome of a criminal proceeding is the imposition of a financial obligation for restitution or compensation, bankruptcy becomes involved as the wrongdoer seeks some control over the financial aspects of the criminal proceeding.

[3]

Structured repayment through a Chapter 13 plan is a very effective way to accomplish payment of criminal restitution or fines. A debtor responsible for payment of a criminal fine or restitution almost always has other debt problems. Bringing order to the debtor’s finances through a Chapter 13 plan can accomplish the payment of all obligations to creditors to a greater degree than is possible without court protection. An especially knowledgeable prosecutor or victim will recognize that payment of a fine or restitution through the controlled environment policed by the Chapter 13 trustee is the best possible outcome for all involved. With the prosecutor’s cooperation, prepetition defaults in the payment of fines or restitution can be cured through a Chapter 13 plan.

[4]

The filing of a Chapter 13 case will not stop a criminal proceeding.3 However, especially when the criminal prosecution is for a bad check, for the conversion of property or for some other property crime and the victim’s real interest is repayment or compensation, the filing of a Chapter 13 case that proposes to satisfy that obligation can help resolve the criminal case.


 

1  11 U.S.C. § 1328(a)(3).

 

2  Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 302, 108 Stat. 4106 (1994). Ironically, § 501(d)(38)(B) of the Bankruptcy Reform Act of 1994 may have (inadvertently) deleted the exception to discharge for restitution and criminal fines in § 1328(a)(3). See § 158.4  Criminal Restitution and Criminal Fines.

 

3  See 11 U.S.C. § 362(b)(1), discussed in § 58.7  Criminal Action or Proceeding Exception. See, e.g., Gruntz v. County of Los Angeles (In re Gruntz), 166 F.3d 1020 (9th Cir. Feb. 4, 1999) (Fletcher, Boochever, Thompson), as amended, 177 F.3d 728 (9th Cir. May 19, 1999) (Fletcher, Boochever, Thompson), withdrawn and reh’g granted, 177 F.3d 729 (9th Cir. July 20, 1999) (Hug), after reh’g, 202 F.3d 1074 (9th Cir. Feb. 3, 2000) (en banc); Gilliam v. Metropolitan Gov’t of Nashville & Davidson Cnty. (In re Gilliam), 67 B.R. 83 (Bankr. M.D. Tenn. Oct. 31, 1986) (Lundin).