As published in The Star-Ledger, September 17, 2012
Q. I understand that there are a number of debt types that cannot be discharged through bankruptcy. What can be discharged, and what can’t? Can a deficiency judgment on a commercial loan be discharged via bankruptcy?
— Jo in Somerset
A. You’re right. Some debts can be discharged, and others can’t.
As for deficiency judgments, well, it depends.
First, Section 523 of the bankruptcy code — "Exceptions to Discharge” — lists many categories of debts that are not included in a discharge obtained by an individual under the bankruptcy code, said Ilissa Churgin Hook, a bankruptcy attorney with Hook & Fatovich in Wayne.
Generally speaking, the most common exceptions to discharge are: domestic support obligations; student loans made, insured, or guaranteed by a governmental unit; fiduciary taxes such as taxes for which a business owner is personally liable including payroll tax and sales tax, and; personal income tax liabilities that are less than three years old from the date of assessment when the bankruptcy case is filed, Hook said.
The list of exceptions goes on: money, property, services, or credit obtained by false pretenses, false representation or actual fraud; consumer debts incurred for luxury goods or services, or cash advances obtained, within defined periods of time prior to the filing of a bankruptcy; debts incurred via fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny; a debt for willful and malicious injury; fines, penalties or forfeitures payable to and for the benefit of a governmental unit; death or personal injury caused by the debtor’s operation of a vehicle while the debtor was unlawfully intoxicated, and; payment of an order of restitution.
Generally, Hook said, a deficiency judgment on a commercial loan is dischargeable in bankruptcy.
“However, if the underlying loan was obtained through fraud, the judgment creditor can commence a non-dischargeability action in the bankruptcy court — a lawsuit filed within the bankruptcy case — seeking a determination that the debt is not dischargeable,” she said.
The judgment creditor bears the burden of proving that the underlying loan was obtained via fraud, such as the debtor purposely submitted a false financial statement which the lender reasonably relied on in making the loan.
Hook said a bankruptcy discharge extinguishes the debtor’s individual liability to repay the judgment amount. However, if the judgment creditor filed a lien against any property owned by the debtor, the lien, in most cases, survives the bankruptcy discharge.
“One exception to this general rule is where the judgment creditor perfects its lien within 90 days prior to the debtor’s bankruptcy filing,” she said. “In such a case, the debtor can avoid the lien under the preference statute contained in Section 547 of the bankruptcy code. Moreover, even if the lien survives the bankruptcy, there are certain instances where the lien can be removed within a limited time period under New Jersey state law.”
As you can imagine, there are some exceptions to the provisions mentioned here, so make sure you talk to a bankruptcy attorney before you file.
- A "Biz Brain" column by Karin Price Mueller