Criminal Restitution in Bankruptcy: Nondischargeability Across Chapters 7, 13, and 11
Criminal restitution obligations represent a significant exception to the fresh start ordinarily provided by bankruptcy law. The intersection of criminal law and bankruptcy creates unique challenges for debtors seeking relief while facing court-ordered restitution. This article examines how criminal restitution is treated across different bankruptcy chapters and the critical distinctions practitioners must understand when counseling clients.
The Foundational Principle: Criminal Restitution is Nondischargeable
The cornerstone principle governing criminal restitution in bankruptcy is straightforward: restitution ordered as part of a criminal sentence cannot be discharged in any bankruptcy proceeding. This applies equally to federal and state criminal restitution orders, regardless of bankruptcy chapter.
The Supreme Court established this framework in Kelly v. Robinson, 479 U.S. 36 (1986), holding that restitution obligations imposed as conditions of probation in state criminal proceedings are nondischargeable under Section 523(a)(7) of the Bankruptcy Code. The Court reasoned that despite restitution’s compensatory appearance, its primary purpose within the criminal justice system is punitive and rehabilitative—benefiting society as a whole rather than merely compensating the individual victim.
Statutory Framework: Multiple Bases for Nondischargeability
Criminal restitution enjoys protection from discharge under multiple provisions of the Bankruptcy Code, creating overlapping safeguards:
Section 523(a)(7) excepts from discharge any debt that “is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss”. Both state and federal criminal restitution fall within this provision. Courts have consistently held that even when restitution is paid directly to victims rather than the government, it remains nondischargeable because it is imposed as part of the state’s criminal judgment and serves rehabilitative and punitive purposes.
Section 523(a)(13) specifically addresses federal criminal restitution, providing that debts “for any payment of an order of restitution issued under title 18, United States Code” are nondischargeable. Congress added this provision through the Violent Crime Control and Law Enforcement Act of 1994 to expressly protect federal criminal restitution orders.
Treatment in Chapter 7 Bankruptcy
In Chapter 7 liquidation cases, criminal restitution obligations are completely nondischargeable. The debtor receives no relief from these obligations, and they survive the bankruptcy discharge in full.
However, Chapter 7 can still provide indirect benefits to debtors facing criminal restitution. By discharging other qualifying debts—such as credit card balances, medical bills, and personal loans—Chapter 7 frees up the debtor’s disposable income to meet criminal restitution obligations and other nondischargeable debts. For a debtor struggling to make restitution payments while drowning in consumer debt, Chapter 7 can create breathing room by eliminating competing financial obligations.
The automatic stay under Section 362(a) does not prevent criminal proceedings or the collection of criminal restitution. Section 362(b)(1) explicitly excepts “the commencement or continuation of a criminal action or proceeding against the debtor” from the automatic stay. Furthermore, under the Mandatory Victims Restitution Act (MVRA), 18 U.S.C. § 3613(a), the government may enforce criminal restitution judgments against the debtor and property of the bankruptcy estate notwithstanding the automatic stay.
Treatment in Chapter 13 Bankruptcy
Chapter 13 offers more strategic advantages for debtors with criminal restitution obligations, though the debt itself remains nondischargeable.
Nondischargeability Under Section 1328(a)(3)
Section 1328(a)(3) of the Bankruptcy Code explicitly provides that the Chapter 13 discharge does not apply to any debt “for restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime”. This provision mirrors the protection in Chapter 7 but within the Chapter 13 context. Even after successfully completing a three-to-five-year Chapter 13 plan and receiving a discharge, the debtor remains liable for any unpaid criminal restitution balance.
Inclusion in the Chapter 13 Plan
While criminal restitution cannot be discharged, it can and should be included in the Chapter 13 repayment plan. This provides several practical benefits:
Extended Payment Timeline: Debtors can spread restitution payments over the life of the Chapter 13 plan—up to five years—potentially at lower monthly amounts than demanded outside bankruptcy. This structured repayment approach can prevent probation violations and incarceration for nonpayment.
Consolidated Payments: Rather than juggling multiple creditors and the probation office, the debtor makes a single monthly payment to the Chapter 13 trustee, who distributes funds according to the confirmed plan.
Protection from Collection Actions: While the automatic stay does not prevent all criminal restitution collection efforts (particularly under the MVRA), the Chapter 13 process can provide some breathing room and structure for addressing these obligations.
Priority Considerations: Criminal restitution is treated as a general unsecured claim in Chapter 13 unless the plan or applicable law provides otherwise. However, because these debts are nondischargeable, debtors and their counsel must ensure the plan provides for their payment to avoid post-discharge liability.
Hardship Discharge Limitation
If unforeseen circumstances prevent a debtor from completing the Chapter 13 plan, the debtor may seek a hardship discharge under Section 1328(b). However, this hardship discharge is more limited than the standard Chapter 13 discharge and does not apply to debts that would be nondischargeable in a Chapter 7 case—including criminal restitution. Therefore, even a hardship discharge provides no relief from criminal restitution obligations.
Treatment in Chapter 11 Bankruptcy
Chapter 11, primarily used for business reorganizations, follows similar principles regarding criminal restitution for individual debtors.
Individual Debtors Under Section 1141(d)(2)
Section 1141(d)(2) provides that “a discharge under this chapter does not discharge a debtor who is an individual from any debt excepted from discharge under section 523 of this title”. This means individual debtors in traditional Chapter 11 cases cannot discharge criminal restitution any more than they could in Chapter 7 or Chapter 13.
Corporate Debtors
The discharge rules differ for corporate and other non-individual entities in Chapter 11. Section 523(a) explicitly refers to debts nondischargeable for “an individual debtor”. Courts have consistently held that the exceptions to discharge in Section 523(a)—including those for criminal restitution—do not apply to corporate debtors. Thus, a corporation that receives a Chapter 11 discharge is not subject to the same exceptions that apply to individuals.
However, this distinction provides limited practical benefit in criminal restitution cases, as criminal restitution is typically imposed on individuals who committed the crimes, not on corporate entities themselves.
Subchapter V for Small Businesses
The Small Business Reorganization Act created Subchapter V of Chapter 11 for small business debtors with debts under $7,500,000. Under Subchapter V, debtors can confirm plans more efficiently and retain equity without providing new value.
For individual small business debtors in Subchapter V cases, Section 1192 governs the discharge. Section 1192(2) excepts from discharge “any debt of the kind specified in section 523(a) of this title”. Since Section 523(a) applies only to individual debtors, individual small business debtors in Subchapter V cases cannot discharge criminal restitution obligations.
The Mandatory Victims Restitution Act and Bankruptcy
The Mandatory Victims Restitution Act (MVRA), codified at 18 U.S.C. §§ 3663A and 3613, significantly impacts how criminal restitution interacts with bankruptcy.
Priority of Restitution Collection
Under 18 U.S.C. § 3613(a), the United States may enforce criminal restitution judgments “against all property or rights to property of the person fined”. This enforcement authority applies to criminal restitution orders through 18 U.S.C. §§ 3664(m)(1)(A) and 3613(f).
Courts have held that the MVRA’s enforcement provisions override conflicting federal statutes, including the Bankruptcy Code’s automatic stay. The Ninth Circuit explicitly ruled that “the automatic stay does not prevent the government from collecting criminal restitution under the Mandatory Victim’s Restitution Act”.
Nondischargeability Under the MVRA
The MVRA expressly provides that restitution orders are not dischargeable in bankruptcy. Section 3613(c) states that criminal restitution liens “shall not be voided in a bankruptcy proceeding”. This reinforces the Bankruptcy Code’s own nondischargeability provisions and ensures federal criminal restitution receives maximum protection.
State vs. Federal Criminal Restitution
While both state and federal criminal restitution are nondischargeable, they reach that result through slightly different statutory paths:
State Criminal Restitution: Nondischargeable primarily under Section 523(a)(7) based on Kelly v. Robinson. The Supreme Court held that Section 523(a)(7) “preserves from discharge in Chapter 7 any condition a state criminal court imposes as part of a criminal sentence,” including restitution.
Federal Criminal Restitution: Protected by both Section 523(a)(7) and the more specific Section 523(a)(13). Additionally, the MVRA provides independent statutory protection outside the Bankruptcy Code.
The National Bankruptcy Review Commission has noted the redundancy of having both Section 523(a)(7) and Section 523(a)(13) protecting restitution, as courts have uniformly applied Kelly v. Robinson to federal restitution as well. However, the dual protection ensures no gaps in coverage.
Practical Considerations for Bankruptcy Practitioners
Attorneys advising clients with criminal restitution obligations should consider several key points:
Pre-Filing Counseling
Clients must understand that bankruptcy will not eliminate criminal restitution. Set realistic expectations that the restitution obligation will survive any bankruptcy discharge. However, explain that bankruptcy can still provide significant benefits by eliminating other debts and creating a structured repayment framework.
Chapter Selection
For clients with primarily unsecured consumer debt and limited assets, Chapter 7 may be appropriate to quickly discharge qualifying debts and free up income for restitution payments.
For clients needing time to pay restitution and facing potential probation violations, Chapter 13 offers a structured five-year payment plan that can prevent immediate enforcement actions. The ability to spread restitution payments over five years while consolidating other debt obligations makes Chapter 13 particularly valuable.
Plan Drafting in Chapter 13
Criminal restitution must be explicitly addressed in the Chapter 13 plan. While some courts accept boilerplate provisions stating all priority debts will be paid in full, best practice is to specifically identify the criminal restitution obligation and provide for its payment.
Ensure the plan provides for meaningful payments toward restitution, as any unpaid balance will survive the discharge. Consider the debtor’s ability to pay after the plan ends when structuring payments.
Probation and Supervised Release Considerations
Filing bankruptcy does not prevent probation revocation proceedings for failure to pay restitution. However, the structured Chapter 13 plan can demonstrate good faith efforts to comply with restitution orders and may satisfy probation requirements.
The automatic stay exception for criminal proceedings means probation officers can continue enforcement efforts, but many will work with debtors who are making regular Chapter 13 plan payments that include restitution.
Preference Actions
Criminal restitution payments made within 90 days before bankruptcy may be subject to avoidance as preferential transfers under Section 547. The Ninth Circuit has held that there is no judicially-created exception preventing the trustee from recovering preferential restitution payments. This creates a potential trap where recent restitution payments could be recovered and redistributed to all creditors pro rata.
Victims’ Rights
Victims holding restitution orders have standing to participate in bankruptcy proceedings and object to plan confirmation or discharge if their restitution rights are not adequately protected. The Federal Crime Victims’ Rights Act reinforces restitution as a fundamental right of victims that courts must enforce despite bankruptcy filings.
Conclusion
Criminal restitution obligations occupy a unique and protected position in bankruptcy law, reflecting the policy determination that criminal defendants should not use bankruptcy to escape accountability to their victims or society. Across all bankruptcy chapters—7, 13, and 11—criminal restitution remains nondischargeable, surviving even successful completion of bankruptcy proceedings.
However, bankruptcy remains a valuable tool for debtors facing restitution obligations. Chapter 7 can eliminate competing debts and free resources for restitution payments. Chapter 13 provides the most practical benefits through extended payment plans and structured repayment frameworks that can prevent probation violations while addressing other debts. Chapter 11, while less common for individual debtors, follows the same basic principle that individual debtors cannot discharge restitution while corporate debtors may receive broader relief.
For bankruptcy practitioners, the key is understanding these limitations while maximizing the legitimate benefits bankruptcy can provide. Criminal restitution will follow the debtor beyond bankruptcy, but careful planning can create a sustainable path forward that satisfies both bankruptcy and criminal law obligations.
