11.5.3.1 General

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The principal goal of most bankruptcies is the discharge, which frees the debtor from personal liability on most debts. However, the discharge is not absolute. Some types of debts, including many criminal justice debts, may not be discharged in a chapter 7 bankruptcy.²⁷⁰

The most common basis for finding criminal justice debts nondischargeable is the Bankruptcy Code provision that excepts from discharge a “fine, forfeiture, or penalty, payable to and for the benefit of a governmental unit [that] is not compensation for actual pecuniary loss.”²⁷¹ To fall within the plain language of this Bankruptcy Code section, to be nondischargeable a debt must be: (1) a fine, forfeiture or penalty, (2) punitive, rather than compensatory, (3) payable to a governmental unit, and (4) for the benefit of a governmental unit.

Despite the clear statutory text, the U.S. Supreme Court in Kelly v. Robinson²⁷² seemingly broadened the scope of this section to include criminal restitution obligations that are arguably compensatory in nature. In Kelly, the debtor was convicted of welfare fraud and ordered to pay restitution in the amount of the welfare overpayment to the State of Connecticut as a condition of probation. The debtor later filed bankruptcy and sought to discharge the debt, arguing that the restitution was compensation for a monetary loss.

The Court concluded that, even though the obligation was the exact amount of the improperly received benefits, the debt was not merely compensation for actual pecuniary loss. Rather, the Court concluded that restitution served a punitive function even if calculated based on the actual pecuniary loss to a victim. The Court also relied on the principles of federalism and its “deep conviction that federal bankruptcy courts should not invalidate the results of state criminal proceedings.”²⁷³ According to the Court, the bankruptcy exception for “fines, forfeitures, and penalties” “preserv[ed] from discharge any condition a state criminal court imposes as part of a criminal sentence.”²⁷⁴

Based on the Court’s reasoning in Kelly, courts have created a complicated patchwork of discharge exceptions and caveats for criminal justice debts, with considerable variation across jurisdictions. Even though exceptions to discharge are to be construed narrowly,²⁷⁵ courts have nevertheless expanded Kelly beyond its limited holding concerning criminal restitution orders. In addition, an explosion in cost-shifting measures, designed to place the onus of funding the courts on largely low-income criminal defendants, and a crisis in access to reasonable bail have fundamentally changed the landscape from that in which Kelly was decided.

Footnotes

270 See National Consumer Law Center, Consumer Bankruptcy Law and Practice § 15.4.3 (12th ed. 2020), updated at www.nclc.org/library.
271 11 U.S.C. § 523(a)(7).

Other less common exceptions to discharge are for: 11 U.S.C. §§ 523(a)(17) (“a fee imposed on a prisoner by any court for the filing of a case, motion, complaint, or appeal, or for other costs and expenses assessed with respect to such filing”), 523(a)(5) (domestic support obligations in regard to parental responsibility for costs to incarcerate juveniles), 523(a)(2) (fraud). See United States v. Horras (In re Horras), 443 B.R. 159 (B.A.P. 8th Cir. 2011) (Medicare fraud).
272 Kelly v. Robinson, 479 U.S. 36, 107 S. Ct. 353, 93 L. Ed. 2d 216 (1986).
273 Id. 107 S. Ct. at 360.
274 Id. 107 S. Ct. at 361.
275 Kawaauhau v. Geiger, 523 U.S. 57, 118 S. Ct. 974, 140 L. Ed. 2d 90 (1998); National Consumer Law Center, Consumer Bankruptcy Law and Practice § 15.4 (12th ed. 2020), updated at www.nclc.org/library.