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Ninth Circuit Reverses Bankruptcy Panel’s Finding that Attorney’s Debt Was Not Dischargeable

The Ninth Circuit United States Court of Appeals recently released a decision that reversed several lower court determinations that a $5,700 debt owed by an attorney and debtor to a former client was not dischargeable. The decision was important because the debtor was attempting to reinstate her law license and could not have any non-dischargeable debts owed to client or governmental organizations on her credit to do so. The Ninth Circuit’s liberal reading of the bankruptcy code in the case may help future debtors discharge their debts in bankruptcy, especially if the analysis is followed in other jurisdictions.

GavelDebtor Was Refused Discharge Because the Debt Was Seen as a “Fine” Rather Than “Compensation”

The plaintiff and debtor in Scheer v. State Bar of CA was a suspended attorney who filed suit against the bar to have her license reinstated. The defendant refused her request, claiming that a debt that she owed to a former client was not eligible to be discharged and barred her from readmission. The defendant claimed that the debt was a “fine, penalty or forfeiture” that was owed on behalf of a government unit, and therefore it was ineligible for discharge.

After appealing the ruling in several jurisdictions, the plaintiff argued the issue at the Ninth Circuit Court of Appeals. The plaintiff contended that the debt she owed was compensation for an actual pecuniary loss to her former client, rather than a penalty as the lower courts determined. After evaluating similar cases from multiple jurisdictions, the Ninth Circuit agreed with the plaintiff and entered a ruling that the debt is dischargeable.

Dischargeability of Various Forms of Debts

Debtors seeking bankruptcy relief should understand that some types of debt may be eligible for discharge, while other types of debt may not be. The case of Scheer v. State Bar of CA demonstrates that the distinction between debts that are eligible or ineligible for discharge is not always cut and dry. If a debt is a sanction, such as criminal restitution, it may not be eligible, but if the same debt is seen as civil compensation to the victim of a wrong, it could be eligible. Some student loans are eligible for discharge, although most are excluded. A qualified bankruptcy attorney can advise clients about which of their debts are realistically dischargeable, and what the chances are that a court will allow or deny more discharges than expected.

When to Contact a Bankruptcy Attorney?

If you or a loved one is in over your head and thinking about a fresh start with bankruptcy, a competent attorney can help you successfully discharge as much of your debt as possible in the process. The Louisville and Southern Indiana bankruptcy attorneys at the Schwartz Bankruptcy Law Center have experience with tough bankruptcies, and we know which strategies work the best to eliminate the most debt. We advise and represent clients in various bankruptcy proceedings, and with our experience you can decide which course of action works best for you. Call 866-366-3328 today to schedule a risk-free consultation or contact us through our website.

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