Although a bankruptcy court has discretion to enter a judgment for the amount of a debt declared nondischargeable, it is an abuse of discretion if the judgment lowers the interest rate to the lower federal judgment rate.
The state got a pre-bankruptcy judgment against a man who obtained unemployment benefits by failing to report income. The state judgment called for interest at the rate of 1% a month.
After a chapter 7 filing, the state sued to declare the debt nondischargeable under Section 523(a)(2)(A). The debtor conceded that the debt was nondischargeable.
The bankruptcy judge declared the debt nondischargeable and entered a judgment for the amount of the debt. The judgment imposed interest at the lower federal judgment rate. The state appealed and won in an opinion on March 10 by District Judge Marco A. Hernandez of Portland, Ore.
Judge Hernandez cited authorities for the proposition that the bankruptcy court has discretion to enter judgment for the debt itself in a dischargeability suit. However, the Supreme Court has pronounced that the “overriding purpose” of Section 523 is to protect victims of fraud.
Judge Hernandez vacated the judgment for the amount of the debt, holding that a bankruptcy court abuses its discretion when the federal judgment harms the creditor’s interest by lowering the interest rate. Vacating the federal judgment allowed the state to collect higher interest under the pre-bankruptcy state judgment.