Debts that stick – even after bankruptcy wipes the slate clean

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For individuals up against an insurmountable wall of debt, bankruptcy offers relief: After the Court grants an order of discharge, the debtor is released from creditors’ claims. But exceptions exist, as set out under Section 178(1) of Canada’s Bankruptcy and Insolvency Act (BIA). Debts falling into one of these classes of claims survive bankruptcy and shadow a debtor for life until paid in full.

Overriding social policy underlies these exceptions, based on the rationale that debts arising out of certain reprehensible conduct should not escape repayment.

One such class of exempt claim is “any award of damages by a court in civil proceedings in respect of (i) bodily harm intentionally inflicted”. An intent to hit is not necessarily the same as an intent to harm, and a recent Ontario decision explored this distinction: Doran v. Melhado. Patrick Doran and Ian Melhado had just left a hockey banquet when Melhado accosted Doran, uttered a threat to kill him, flicked his cigarette at the back of Doran’s head, spit in his face and then sucker punched him. Doran suffered a partial loss of vision, facial scarring and psychological distress. Melhado was criminally charged and convicted of assault.

Doran, his wife and daughter then went to civil court and were awarded $30,000 in damages to Doran, $2,500 each to his wife and daughter for their loss of Doran’s care, guidance and companionship, $65,000 in costs and $10,000 in disbursements.

The family then sought a declaration that an order of discharge – should Melhado ever seek one – would not release him from paying the damages awarded to the Dorans. Melhado resisted, saying that while he may have intended to hit Doran, there was no proof that he intended to bring Doran harm, as required by Section 178.

The Court disagreed, saying that the evidence pointed to a clear intent to harm, and granted the declaration. Interestingly, though, it did not extend to the damages awarded to Doran’s wife and daughter, as these were based on a derivative claim under provincial laws (the Ontario Family Law Act), outside of the scope of Section 178.

The case illustrates how a victim’s right to compensation can, under certain circumstances, trump the protections that a debtor might otherwise enjoy in bankruptcy. Notably, the burden of proof rests with the creditor.

Under similar circumstances, both creditors and debtors do well to seek legal advice – the former to investigate and advance their claim, the latter to gain a clear understanding of areas in which bankruptcy may not completely erase their full indebtedness.

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