Rehearing needed on dischargeability of costs and fees in criminal cases

In the case of In re Lopez, the U.S. Third Circuit Court of Appeals examined the question as to whether certain unpaid costs and fees assessed against the debtor in state criminal proceedings could be discharged in bankruptcy.

Background and procedural history

Between 2006 and 2008, the debtor was named as a defendant in seven state court criminal proceedings in Pennsylvania. The debtor owed $1,716.77 for costs and fees related to the criminal proceedings. The debtor paid the fines and restitution, leaving a balance of $1,367.77.

The state court turned the account over to a debt collector, filed liens, obtained at least one civil judgment against him, and demanded additional sums as collection fees.

In 2009, the debtor filed a voluntary petition in bankruptcy under Chapter 7 and obtained a general discharge.

A discharge order discharges the debtor from all debts arising before the date of the order, but it is subject to certain exceptions under section 523 of the Bankruptcy Code. That section provides an exception where the debt is for a fine, penalty, or forfeiture that is owed to the government and is not compensation for actual pecuniary loss, with the exception of certain tax penalties.

When the state court continued their debt collection efforts against the debtor following the discharge in bankruptcy, the debtor filed suit in the bankruptcy court, arguing that the remaining debt was dischargeable because the costs and fees were imposed to finance court services and were not fines, penalties, or forfeitures assessed for the purpose of punishment.

The parties stipulated that the debt included collection fees, court costs, lien filing fees and the following assessments:

  • Access to Justice
  • Clerk of Quarter Sessions Fees
  • Crime Victims Compensation Fund
  • Criminal Lab Fees
  • Diversion Program Fees
  • Domestic Violence Compensation
  • Firearm Education and Training Fund
  • Judicial Computer Project Fees
  • Offender Supervision Program
  • Victim/Witness Services Fund

The bankruptcy court decided that these stipulated costs and fees were all nondischargeable. On appeal, the federal district court upheld the bankruptcy court's decision. The debtor filed an appeal in the U.S. Third Circuit Court of Appeals.

The Third Circuit's ruling

The Third Circuit vacated the district court's decision because the record was incomplete and sent the case to the bankruptcy court for a new hearing. No description of the criminal proceedings, or of their outcomes, was established in the court records. The courts were not provided with copies of the charging documents, the sentencing judgments, or the docket sheets .

The appeals court offered some guidance to the bankruptcy court on remand. Amounts should be discharged where they were not imposed as part of a criminal sentence, and where they do not fall within the plain meaning of the words "fine, penalty, or forfeiture."

The appellate court said that collection and lien filing fees were "potential candidates" for discharge, but left that for the bankruptcy court to decide after the parties submitted additional evidence that was sufficient to make the required factual findings.

Costs assessed as part of a state criminal sentence are nondischargeable in a Chapter 7 bankruptcy if they are "payable to and for the benefit of a governmental unit" and are not "compensation for actual pecuniary loss" regardless of whether they were intended to punish the offender, the appeals court said.

Contact an attorney

Individuals seeking bankruptcy relief should consult the legal advice of an attorney experienced in such matters to ensure the protection of their legal rights.