What Is a Willful and Malicious Injury That Can Exclude a Debt from Bankruptcy Discharge?
Bankruptcy is a legal remedy that allows individuals and businesses to discharge most of their debts. However, there are some types of debts that are not dischargeable in bankruptcy, including those that are based on willful and malicious injury by the debtor. This exclusion of these debts in Chapter 7, Chapter 11 and Chapter 13 cases can be a source of contentious proceedings.
The U.S. Bankruptcy Code defines willful and malicious injury as “any injury to an entity or to the property of an entity caused by willful and malicious conduct of the debtor.” The term “willful” means that the debtor intended to cause the injury. “Malicious” means that the debtor acted without just cause or excuse. A debt based on such conduct arises when a judgment is obtained in a civil lawsuit, usually for a cause of action alleging intentional harm to persons or property. This includes theft, fraud and other wrongful diversion of money or property from its owners. It can also be based on defamation. The prevailing party in that lawsuit is known as a judgment creditor. The loser is the judgment debtor.
If the judgment debtor files for bankruptcy, the judgment creditor can bring a separate case in bankruptcy court known as an adversary proceeding. However, merely having won a judgment in the underlying case is not enough for the creditor to prevail in the adversary case. The bankruptcy court must conduct independent factfinding to conclude that the debtor’s conduct was willful and malicious. The judgment creditor has the burden of proving both of these elements by a preponderance of the evidence, which means it is more likely than not that they occurred.
If a creditor files a complaint initiating an adversary proceeding, the debtor can raise several defenses, such as the following:
- Lack of intent — The debtor must have intended to cause the injury, not simply have taken a course of action that contributed to the injury.
- Justification — The debtor may have had just cause or excuse, such as self-defense or defense of another person, which would make the action non-malicious.
- Vicarious liability — The debtor may have been held responsible for another person’s actions while having committed no wrongful act of his own, such as in the case of partners and company co-directors.
- Lack of causation of harm — Even if there was willful and malicious conduct, the creditor’s damages may have been caused by other factors.
The bankruptcy code sets forth several other types of debts that can be excluded. If you are seeking bankruptcy protection, you need a skilled attorney to deal with potential challenges to debt dischargeability.
At the Law Offices of Michael Jay Berger in Beverly Hills, I have decades of experience handling all aspects of bankruptcy cases, including adversary proceedings. Please call 310-271-6223 or contact me online to schedule a free initial consultation.