"The Best Collection/Business Services Money Can Buy"

Members of The Missouri Collectors Association

The Association of Credit and Collection Professionals

Members of the Maryland Heights, Clayton and Fenton Chambers of Commerce

BAD CHECKS AND BANKRUPTCY

Intersection of Bad Check Prosecutions with the Bankruptcy Code's Automatic Stay and Discharge Injunction (April 3, 2006)

How many of the 450 million bad checks written this year in the United States have you received?  No doubt you have seen your fair share and know the drill … file a civil action to collect or initiate criminal prosecution under your state’s statutes.  You probably also know that the Fair Debt Collection Practices Act specifically prohibits the “threat” of criminal action against an individual if you do not intend to pursue the criminal action or do not have the ability to do so.  Civil and criminal remedies are effective, but what happens if a bad check issuer files bankruptcy?

Does The Automatic Stay Apply To “Bad Check Prosecution?”

The filing of a bankruptcy petition imposes an “automatic stay” on all collection actions to prohibit any further efforts to collect debt that arose prior to the bankruptcy filing.  However, the “automatic stay” does not extend to proceedings by the state pursuant to its police powers.  Thus, prosecutions to enforce criminal laws are not subject to the automatic stay.  In the eyes of the bankruptcy court, “bad check prosecutions” are not attempts to collect the debts so long as the real purpose of the prosecution is to enforce the criminal bad check laws rather than to pressure the debtor into paying a debt that might otherwise be discharged during bankruptcy. 

What Is Your Real Purpose In Bad Check Prosecution? What Do Your Policies Say?

Your behavior will determine how the bankruptcy court will view whether your “bad check prosecution” is really intended to enforce criminal law.  Quite simply, you should take a “hands off” approach to the prosecution.  The government prosecuting attorney will be your attorney in this matter.  Neither you nor your counsel can have any communication whatsoever with the debtor or debtor’s counsel pertaining to the bad check. The criminal prosecution should be allowed to take its course.  If you abide by these simple rules, even though the penalty for passing a bad check ends up being restitution to you (on a debt that otherwise might be dischargeable in bankruptcy), the bad check prosecution can go forward notwithstanding the filing of the bankruptcy petition. 

Also critical to your “real purpose” is whether this prosecution is being handled consistently with your company’s written policy regarding prosecution of bad checks.  Your credit manual should clearly set out the circumstances under which you will prosecute.  In order to avoid sanctions for violation of the automatic stay, the decision to prosecute bad check issuers should be consistent with your policies and history of handling similar matters.

Dischargeability Of Bad Check In Bankruptcy

What about the bad check debt being discharged during bankruptcy?  Bankruptcy Code Section 547 provides that a bankruptcy discharge does not relieve an individual debtor from any debt for money, property, services or an extension, renewal or refinancing of credit to the extent obtained by false pretenses, false representation or means of actual fraud. Therefore, when an irate creditor comes to bankruptcy court in a chapter 7, 13 or 11 case where the creditor is holding the check issued by the debtor that was dishonored, the expectation may be that the debt is not dischargeable.  Unfortunately, debt based on a bad check is not automatically and not even usually held to be non-dischargeable.

The bankruptcy courts have split on whether delivery of a bad check constitutes a representation to pay.  The majority of courts have held that issuing a bad check alone without more evidence of misrepresentation or bad faith does not constitute grounds to deny dischargeability of the debt.  Another line of cases holds that the mere tendering of a bad check for goods and services constitutes implied or actual representation that the issuer has good funds to cover the check and that if the check is bad it should be a non-dischargeable debt on the basis of fraud and misrepresentation.  To succeed in getting a bankruptcy court to find a bad check debt is non-dischargeable, the creditor has the burden of proof to show fraud or false representation by the debtor.

What is Fraudulent Intent?

The bankruptcy court will not look to state bad check statutes for guidance on what is evidence of fraudulent intent whenever a bad check is issued.  The bankruptcy court will instead look at whether the issuance of the bad check constitutes a representation of a material fact or an intent to pay the amount of the check and whether such representation is fraudulent.  Factors that courts have looked at to determine whether a bad check debt should be dischargeable are: (1) whether there is an agreement between the parties to hold a post-dated check; (2) the time between delivery of the check and the bankruptcy filing; (3) whether prior to delivery of the check the issuer consulted an attorney about bankruptcy; (4) the number of bad checks; (5) the amount; (6) the debtor’s financial condition at delivery of the check; (7) whether multiple checks were delivered the same day; (8) whether the debtor was employed at the time the check was written; (9) whether the check was written on a closed account; (10) the debtor’s financial sophistication; and (11) whether luxuries or necessities were purchased.

How Much Debt Is Non-Dischargeable?

Even assuming the creditor succeeds in having a bad check determined to be non-dischargeable, the question remains of how much of the debt is non-dischargeable.  Bankruptcy cases have held that, in addition to the actual amount of the check, the amount of interest, court costs, check service charges, bank charges and other actual damages and attorney fees which arose due to the issuance of the bad check, would also not be dischargeable.

Court Ordered Restitution Or Fines Dischargeable?

If criminal restitution or fines from a bad check criminal prosecution have been ordered by a court, such restitution or fines are not dischargeable in bankruptcy.  Under the Criminal Victims Protection Act of 1990,  any restitution awards or criminal fines included in a sentence for conviction of a crime are exempted from a Chapter 13 discharge. Also, a U.S. Supreme Court case upholding exempting from Chapter 7 discharge any condition a state criminal court imposes as part of a criminal sentence has been interpreted by various bankruptcy courts and circuit courts to include restitution or fines for bad checks.

Objection To Discharge

Remember also that even to get to the issue of whether a bad check is dischargeable in the bankruptcy, the creditor must be vigilant in the case and must object to the discharge of the bad check debt within a specified period of time in the case or the debt will be discharged.  An adversary proceeding is required and there may be substantial costs in pursuing non-dischargeability.  The bad check prosecution with its possibility of a restitution order (which is never dischargeable) may be more cost efficient.

The information presented on this page is not to be construed as legal advise

[ Home ]                                                   

Send mail to ibsllc@ibsllc.net with questions or comments about this web site.

Integrated Business Services, LLC/IBS Collection Services/IBS Credit Verification
Copyright © 2006 Integrated Business Services, LLC. All rights reserved.
Revised: 01/21/08