Author: Andrew M. Thaler
I am often asked if bankruptcy can discharge an employer’s obligation to pay wages to an employee. The answer is – it depends. The bankruptcy code sets forth a list of certain debts that an individual cannot discharge. Drafters of the Bankruptcy Code decided that it would be against public policy to discharge certain debts (i) owed to financially vulnerable persons; (ii) owed to governmental entities; or (ii) that arise out of a debtor’s bad behavior. If a debt falls into one of those categories, there is a high likelihood that the debt may not be discharged in a chapter 7 bankruptcy.
The Bankruptcy Code specifically excepts from discharge, debts procured by fraud, fraud or defalcation while acting as a fiduciary, embezzlement, domestic support obligations, willful and malicious injury, death or personal injury caused by unlawful operation of a vehicle while under the influence of intoxicating substances, most student loans and many taxes, to name a few.
There is no specific exception to discharge for not paying wages to an employee. So, the short answer is that claims for wages can be discharged if it is deemed to be nothing more than a breach of contract. However, if there are findings that the employer acted with either personal malevolence or with conscious disregard to the employer’s duty to pay employee wages, the debt could be deemed non-dischargeable under the “willful and malicious” category of debts that will not be discharged.
Exceptions to discharge are strictly and narrowly interpreted so as to promote the Bankruptcy Code’s purpose of providing a fresh start to debtors. A plaintiff seeking to object to discharge of a debt bears the burden of establishing the requisite elements by a preponderance of the evidence. The bankruptcy statute contemplates willful and malicious injury analogous to an intentional tort in these matters.
Although a debtor may have breached an employment contract with the worker by failing to pay wages that were due, a breach of contract unaccompanied by tortious conduct does not give rise to a non-dischargeability claim. The mere failure to pay an obligation cannot be a willful and malicious injury in and of itself. There must be other facts to support willful and malicious conduct. One court has held that the debtor committed a tort willfully because, inter alia, he knew he owed wages to his employee, that his failure to pay those wages would, with substantial certainly harm his employee, and he had the means to pay wages but refused to do so. If funds have been earmarked for wages or debtor lies about his ability to pay wages, while at the same time diverting assets for debtor’s personal use to avoid paying those wages, the willful and malicious standard has probably been met. The cases are very fact sensitive.
Even without personal malevolence a person will be found to have acted maliciously when that person acts in conscious disregard of his or her duties or without just cause or excuse. Malice require conduct more culpable than that which is in reckless disregard of the creditor’s economic interest and expectancies. A debtor acts with malice by intending or fully expecting to harm the economic interest of the creditor. A debtor’s knowledge that he is violating the creditor’s legal rights is insufficient to establish malice absent additional aggravating circumstances. Thus, it must be established that the debtor intended the consequences of his act to cause harm to the creditor, not simply the act itself.
In short, there are three elements the creditor must prove. One, the debtor acted willfully. Two, the debtor acted maliciously. Three, the willful and malicious actions caused injury to the creditor or its property.
Consultation with an experienced bankruptcy attorney is advised if faced with this situation.
There is no specific exception to discharge for not paying wages to an employee. So, the short answer is that claims for wages can be discharged if it is deemed to be nothing more than a breach of contract. However, if there are findings that the employer acted with either personal malevolence or with conscious disregard to the employer’s duty to pay employee wages, the debt could be deemed non-dischargeable under the “willful and malicious” category of debts that will not be discharged.
Exceptions to discharge are strictly and narrowly interpreted so as to promote the Bankruptcy Code’s purpose of providing a fresh start to debtors. A plaintiff seeking to object to discharge of a debt bears the burden of establishing the requisite elements by a preponderance of the evidence. The bankruptcy statute contemplates willful and malicious injury analogous to an intentional tort in these matters.
Although a debtor may have breached an employment contract with the worker by failing to pay wages that were due, a breach of contract unaccompanied by tortious conduct does not give rise to a non-dischargeability claim. The mere failure to pay an obligation cannot be a willful and malicious injury in and of itself. There must be other facts to support willful and malicious conduct. One court has held that the debtor committed a tort willfully because, inter alia, he knew he owed wages to his employee, that his failure to pay those wages would, with substantial certainly harm his employee, and he had the means to pay wages but refused to do so. If funds have been earmarked for wages or debtor lies about his ability to pay wages, while at the same time diverting assets for debtor’s personal use to avoid paying those wages, the willful and malicious standard has probably been met. The cases are very fact sensitive.
Even without personal malevolence a person will be found to have acted maliciously when that person acts in conscious disregard of his or her duties or without just cause or excuse. Malice require conduct more culpable than that which is in reckless disregard of the creditor’s economic interest and expectancies. A debtor acts with malice by intending or fully expecting to harm the economic interest of the creditor. A debtor’s knowledge that he is violating the creditor’s legal rights is insufficient to establish malice absent additional aggravating circumstances. Thus, it must be established that the debtor intended the consequences of his act to cause harm to the creditor, not simply the act itself.
In short, there are three elements the creditor must prove. One, the debtor acted willfully. Two, the debtor acted maliciously. Three, the willful and malicious actions caused injury to the creditor or its property.
Consultation with an experienced bankruptcy attorney is advised if faced with this situation.
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