Bankruptcy expert Leon Bayer answers real-life questions.
The Case of the False Alarm
I’m getting ready to file bankruptcy. I have a small plumbing business. I owe money to the city for several fines incurred because police responded to false burglar alarms at my shop. Can I wipe out these fines in bankruptcy?
Good question – the answer could go either way. Whether you can discharge the city fines in your Chapter 7 bankruptcy depends on how the municipal ordinance is worded and how the penalty amount was determined.
Most Government Fines Cannot Be Discharged in Bankruptcy
Ordinarily, fines and penalties owed to a government entity are automatically nondischargeable in bankruptcy; the government entity doesn’t have to file of a complaint or objection to prevent their discharge. (Learn more about the bankruptcy discharge.)
Exception: Compensation for Actual Pecuniary Loss
However, there is an important exception to this rule. If the government fine is meant to compensate for an “actual pecuniary loss” rather than to penalize the business, then it is dischargeable. In other words, you can wipe out the fines if the government was simply passing on to you its actual cost of responding to the false alarms.
A few examples will demonstrate how this works.
Example 1. Say the fine is $200, and that $200 is the actual average cost incurred by the city to respond to a false alarm. In this case, the full amount of the fine goes towards compensating the government for its actual loss. This fine would be dischargeable.
Example 2. Say the fine is $1,000, but the city’s actual cost of responding to a false alarm is only $200. In this case, the fine is a penalty, and is not dischargeable in bankruptcy.
Leon Bayer is a Los Angeles bankruptcy attorney. He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy. The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo. By answering a question on this blog, Mr. Bayer does not become your lawyer.