First some background. Congress deliberately made it difficult to interfere with a bankruptcy. Bankruptcy is a safety valve for society. Our economy is based on small businesses selling products and hiring employees. A lot of people would never take such a risky step, so it is important to protect those entrepreneurial people. If someone's first business fails but they are put in debtors prison or forced to repay the debts for the next 50 years, they won't start a second or third business that might be successful. No less a source than the Wall Street Journal has called America's bankruptcy system the engine of its economic prosperity. Since bankruptcy serves such an important social function, it should be hard to derail. It is.
Some debts automatically survive bankruptcy. These are debts that Congress (sometimes foolishly) has decided are more important than the goal of discharging debts in bankruptcy to give people a fresh start. Examples are child support, alimony, taxes, criminal fines, criminal restitution, student loans and injuries inflicted on third parties while the debtor was driving under the influence of alcohol or drugs. This post is not about these automatic exceptions to discharge (although there is more to it than I have mentioned so far). This post is about debts in a gray area. They might survive bankruptcy and they might not. These are the so-called "misconduct" exceptions to discharge.
The three major misconduct exceptions to discharge are fraud (oral or written), breach of a fiduciary duty to someone, and willful and malicious conduct. Congress has deliberately slanted the playing field in favor of debtors (people who file bankruptcy). Creditors must prove their case specifically. It is insufficient for creditors to prove you owe them money; that is very reason you filed a bankruptcy. Congress was obviously aware that sometimes large financial institutions can put tremendous pressure on debtors simply because they have the financial resources to pursue them in Court; some consumer exception cases can result in the bank having to pay your attorney's fees if you defend the case successfully.
I have defended a lot of exceptions to discharge over the past 29 years, some in my own cases and some cases filed by other attorneys. It is an interesting area of practice and important to the clients.
