28 Feb Dealing with Hot Checks in Bankruptcy
An individual issues a hot check (also known as a “Bad Check,” a “NSF Check,” a “Dishonored Check,” or a “Bounced Check”) when they fraudulently write a check despite having knowledge of the fact that they do not have the funds available to cover the check. For example, an individual who issues a check for $500.00 knowing that their bank account only has $250.00, can be charged with an offense for this action. The issue is one dealt primarily in Criminal Law, however, the issue does arise in Bankruptcy. Dependent on the amount that the check issued, an individual could be charged criminally with either a misdemeanor or a felony. There may also be civil ramifications as well.
When you file Bankruptcy, the automatic stay is effective the moment a bankruptcy petition is filed. See 11 U.S.C. § 362. This means that for a period of time, creditors cannot attempt to collect on any debts, including the debt for which you wrote the hot check. However, If you are criminally charged with writing a hot check, regardless of whether it is a misdemeanor or a felony, filing Bankruptcy will NOT stay the criminal prosecution. Section 362(b)(1) of the Bankruptcy Code provides that “[t]he filing of a petition . . . does not operate as a stay . . . under subsection (a) of this section of the commencement or continuation of a criminal action or proceeding against the debtor . . . .” 11 U.S.C. § 362(b)(1). In other words, Bankruptcy will not prevent the state from pursuing criminal charges against you. Filing Bankruptcy will also NOT discharge your criminal liability for any restitution, and any costs and fines associated with the criminal prosecution.
Despite Bankruptcy not being able to prevent criminal prosecution, it is possible to discharge the debt owed in a Chapter 7 or a Chapter 13 Bankruptcy. However, creditors may argue that the underlying debt would not be dischargeable pursuant to Section 523(a)(2)(A) of the Bankruptcy Code. This section reads, in relevant part:
(a) A discharge . . . does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud . . . .
On its face, Section 523(a)(2)(A) states that a debtor must have first obtained something. In other words, did the debtor obtain “money, property, services, or an extension, renewal, or refinancing of credit” by writing the bad check? See 11 U.S.C. § 523(a)(2). The next step in the analysis is whether the debtor made a false representation or actual fraud to obtain that something. See 11 U.S.C. § 523(a)(2)(A).
The Fort Worth Division of the Northern District of Texas in In re Dillon dealt with a somewhat similar issue. In that case, the debtor sought to discharge a debt based upon a judgment rendered in a state court proceeding where debtor issued a check for $225,000.00. In re Dillon, 446 B.R. 260, 262 (Bankr. N.D. Tex. 2010). The debt dealt with debtor trying to purchase real estate, wherein debtor was having trouble securing funds for earnest money. However, on April 30, 2008, the parties (including the debtor) agreed to a final purchase price wherein debtor agreed to pay $225,000.00 in earnest money by May 02, 2008. The contract had been amended five times prior the meeting on April 30, 2008, and, after confusion regarding the purchase price and sale of easement pipelines (not relevant in this case), the debtor decided to put a stop payment on the $225,000.00 check after the check was deposited and closing documents were executed. The check was subsequently dishonored. The creditor then sought that the debt not be discharged pursuant to Section 523(a)(2)(A) of the Bankruptcy Code because debtor had issued a check wherein he was aware that he did not have the funds to cover the debt, and that “his utterance of his personal check constituted a misrepresentation on which [creditor] relied. Id. at 265.
In addressing the first question of a § 523(a)(2)(A) analysis, the Northern District determined that the debtor did not obtain any money, property, services, or an extension, renewal, or refinancing of credit by utterance of the check. The Northern District held this despite the creditor having executed the contract as a result of the check. Id. at 266 (stating that the check may have bought him “two-days of credit,” but “given the short time involved, hardly seems commensurate with denial of the debt represented by the Judgment.”). Moreover, the Northern District addressed the issue of whether the issuance of a bad check amounts to a representation that is false. For example, “[w]here a debtor has believed himself able and intended to make his check good, the courts have not found a false representation in the utterance of the check.” Id. (citing Roebuck Auto Sales, Inc. v. Mahinske (In re Mahinske), 155 B.R. 547, 551 (Bankr. N.D. Ala. 1992). The Court in Roebuck Auto Sales stated that “honest people often write hot checks knowing that their funds are lacking, but do so with the honest belief that they will be able to make up the deficit before the check is presented.” Roebuck Auto Sales, Inc. v. Mahinske (In re Mahinske) at 551. The Northern District could not find any evidence that the debtor made a false representation. If we assume that a debtor made a false representation, there must also be justifiable reliance. In re Dillon at 268 (citing Field v. Mans, 516 U.S. 59, 74-75 (1995). According the Northern District of Texas, “[t]he inquiry focuses on whether the falsity of the representation was or should have been readily apparent to the individual to whom it was made.” Id. at 269. The Northern District of Texas did not find any justifiable reliance in that case. Ultimately, the Court found for the debtor and the debt was dischargeable.
Ultimately, don’t write a hot check. You could face criminal prosecution, civil liability, and the underlying debt may not be discharged. It is always important to consult with an attorney.