Bankruptcy for Smarties # 2
Previously I described the different “flavors” of bankruptcy. However, to the layperson the term "bankruptcy" refers to a forgiveness of debt or discharge.
Ordinary debts such as credit cards for consumers or trade debt for business are discharged. Child support and maintenance (what we used to call alimony) are not discharged. Fraud, embezzlement, and the like are not discharged and will survive bankruptcy unless the approved plan so provides (in Chapter 11 only). Willful and malicious injuries, where the debtor intends not only the act but also the injury, are not discharged. For example, assume a shoddy building contractor intentionally uses cheap cement in a project; the structure collapses and people are killed. The contractor will receive a discharge unless the victim's family can prove he was a sort of mafioso who intended harm. (I made this argument to the Supreme Court in the Kawaauhau case that I described in an earlier post.)
Certain taxes can be discharged. Withholding taxes are never discharged because they are trust fund taxes. For instance, if a person files for relief under any chapter and owes $10,000 in withheld income taxes, $10,000 in Social Security taxes withheld from employees' checks, and $10,000 in so called matching Social Security (the latter is an employer's sole obligation and is not a deduction from employee paychecks), only the latter can be discharged. Income taxes can be discharged if they are more than three years old. Making that calculation is very difficult because the three years run from the date the tax return for the unpaid taxes was last due. Thus, if someone owes taxes for tax year 2000 and filed a tax return on April 15, 2001, he could receive a discharge if he filed on or after April 16, 2024, provided he did not receive an extension to file even if he did not use it. If he received an extension, care must be taken to make sure that the case is filed more than three years after the extension expired (in this case, on or after October 16, 2004).
Fines cannot be discharged. Student Loans, whether from the government or a private lender, can be discharged only if paying them would be a substantial burden. This is almost impossible to prove because Courts have held that even though a person might not have the ability to pay, things might change over the next 30 years!
The teaser that I left you with last time related to Donald Trump and a potential Chapter 11 filing. Obviously, it would be very complicated. If Trump filed, he initially would be a "Debtor" because there is no trustee in Chapter 11 and the Debtor acts as "Debtor in Possession" (unless a trustee is appointed at the request of creditors). Thus, lawyers who were hired by Mr. Trump to prepare his case could NOT represent him as the Debtor in Possession. The lawyers for the Debtor in Possession actually would be representing his estate and therefore his creditors, and actually might sue Trump himself if he transfers assets fraudulently or does not disclose assets.
Trump's lawyers representing him (as Debtor and not as Debtor in Possession) would be responsible for accurately filing bankruptcy schedules or lists of assets. Various parties would work together to agree on a plan that would pay secured creditors the value of their collateral, pay most taxes in full (including those generated during the proceeding) and pay something to the unsecured creditors. Trump's abuse victims would have NO PRIORITY! They would be treated the same as a supplier of toilet paper.
Regardless of the Plan and what the abuse victims received, they still might be able to collect the balance due them after plan payments because the actions might have been willful and malicious. Everything Trump did or said was willful, because he intended to do or say them. What would be harder to prove is that he intended to injure them. There have been many post-Kawaauhau rulings that any physical harm involves intent to injure. Thus, pussy grabbing probably would not be discharged. However, reckless speech where Trump didn't care about the victims probably would survive. Additionally, any fines would not be discharged. The tax situation would be very complicated because some taxes would receive priority and some would not. Some taxes would be discharged, and some would not, if for instance no tax return was filed or a fraudulent return was filed.
In short, it would be a mess!