Does a fraudulent transfer make a debt nondischargeable in bankruptcy?

If makes fraudulent transfers after a judgment is issued, does that make the debt nondischargeable in bankruptcy?

Money Transfer in Garnishment

Fraudulent transfers and preference payments are some of the more regularly litigated matters within a bankruptcy case.  A fraudulent transfer generally refers to a transfer of assets made by a debtor with the intent to hinder, delay or defraud the creditor.  A preference generally occurs when a debtor pays one creditor more than that creditor would receive in a bankruptcy case at the expense of another creditor.

If a creditor has already obtained a judgment against a creditor, would a fraudulent transfer make that underlying debt dischargeable?

In this case out of the Bankruptcy Court for the Northern District of Florida, a creditor had obtained multiple judgments against a debtor, which totaled about $1.8 million.  After the judgment was entered and the creditor sought to collect on the judgment, the debtor made several fraudulent transfers and avoided paying the judgment.

Thereafter, the debtor filed for bankruptcy.  In that bankruptcy case, the creditor filed a complaint seeking a determination that the debt underlying its judgments should be nondischargeable because the debtor made these fraudulent transfers to avoid paying the judgment.

The debtor then filed a motion to dismiss the complaint, arguing that the debt underlying the judgments is dischargeable, and that the post-judgment transfers do not convert a debt from dischargeable to nondischargeable.

In its analysis, the court looked to section 523(a)(6) of the Bankruptcy Code, which makes nondischargeable debts for willful and malicious injury by the debtor to another entity or to the property of another entity.  After reviewing the statute and relevant cases, the court came to the conclusion that a debtor’s actions which occur after the debt had been incurred or, as here, after a judgment has been entered, cannot sustain a claim for nondischargeability.

The court found that whether a debt is dischargeable or not depends on the circumstances giving rise to the debt in the first place.  If the creditor’s claim is a result of a debtor’s willful and malicious injury, then the debt may be nondischargeable.  If the creditor’s claim, however, is a regular claim (like breach of contract), then the debt should remain nondischargeable.

The debtor’s actions after the creation of the debt don’t change the claim from dischargeable to nondischargeable.  BankCorpSouth Bank v. Shahid, AP-16-3009-HAC (In re Shahid, 15-30868-HAC)(Bankr. N. D. Fl., Nov. 2016).

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