In the bankruptcy case of George, Brian K. and Olga; In re (Hogan v. George), the bankruptcy court ruled that damages awarded for fraud and punitive damages were excepted from bankruptcy discharge while damages awarded for negligent misrepresentation and breach of contract were not excepted from bankruptcy discharge.
The details of the bankruptcy case:
The plaintiffs sued the debtors in Colorado over the purchase of land. The debtors then filed for Chapter 13 relief. That case was voluntarily dismissed a few weeks later, after which the Colorado action proceeded to trial. The jury found that the debtors engaged in misrepresentation/fraud in the inducement, negligent misrepresentation, and breach of contract. The plaintiffs were awarded $171,000 on each count and $187,000 in punitive damages. The debtors then filed for Chapter 11 relief, and converted to Chapter 7 on Oct. 21, 2009. On Nov. 12, the bankruptcy court ruled that the plaintiffs' claim was partially excepted from discharge. The plaintiffs asked for reconsideration, asserting that the entire amount should have been excepted from discharge because the judgment was cumulative in nature. The bankruptcy court overruled the plaintiff's request for reconsideration.
While bankruptcy courts have been inconsistent on how punitive damages should be handled during bankruptcy, in general, punitive damages are not discharged in bankruptcy. Because bankruptcy is designed to offer debt relief and a fresh financial start to the honest debtor, punitive damages are not discharged because they are incurred due to some wrongdoing. On the other hand, damages awarded because of negligence or breach of contract are not always due to the debtor's purposeful wrongdoing. For example, a debtor may have been negligent or breached a contract because of incompetence not because they maliciously attempted to damage the creditor/claimant. And in that case, damages granted due to negligence or breach of contract may still be discharged in bankruptcy.