No, bankruptcy would not get Trump out of paying his civil fraud penalties

UPDATE (03/25/2024): A New York appeals court agreed on March 25 to give former President Donald Trump 10 more days to secure a bond while he appeals his $454 million civil fraud judgment. The court also reduced the amount of the bond to $175 million. Payment of the bond will prevent the state from seizing his assets while he appeals. The story continues as originally published below. 

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On March 18, Donald Trump’s lawyers told a New York appellate court that the former president couldn’t post a bond covering the full amount of a $454 million civil fraud judgment while he appeals.

In February, state appeals court Judge Arthur Engoron ruled that Trump and his co-defendants schemed for years to deceive banks and insurers by inflating his wealth on financial statements used to secure loans and make deals.

With interest, Trump owes the state $456.8 million. He must post a bond covering the full amount of the judgment in order to pause its enforcement, which is set to begin on March 25. New York Attorney General Letitia James has said she would seek to seize some of Trump’s assets if he is unable to pay.

Citing rejections from more than 30 bond underwriters, Trump’s lawyers wrote in a court filing that “obtaining an appeal bond in the full amount” of the judgment “is not possible under the circumstances presented.”

Trump claimed last year that he has “over $400 million in cash,” but back-to-back courtroom defeats, including the defamation case against the writer E. Jean Carroll, have pushed his legal debt north of a half-billion dollars, according to his lawyers.

Now, some social media users and others online are questioning whether filing for bankruptcy could get Trump out of paying his civil fraud penalties.

THE QUESTION

Would filing for bankruptcy get Trump out of paying his civil fraud penalties?

THE SOURCES

• New York State Unified Court System
• United States Bankruptcy Code
• United States Courts
• Gregory L. Germain, J.D., professor of law and director of the Bankruptcy Clinic at the Syracuse University College of Law
• Robert Lawless, J.D., Max L. Rowe professor of law and co-director of the Program on Law, Behavior and Social Science at the University of Illinois Urbana-Champaign College of Law
• Adam J. Levitin, J.D., Carmack Waterhouse professor of law and finance at Georgetown University Law Center

THE ANSWER

No, filing for bankruptcy would not get Trump out of paying his civil fraud penalties.

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WHAT WE FOUND

Bankruptcy would not get former president Donald Trump out of paying his civil fraud penalties. That’s because Trump would still be liable to pay even if he or the Trump Organization declared bankruptcy, according to U.S. bankruptcy law.

According to the United States Courts, bankruptcy typically helps people who can no longer pay their debts get a fresh start by liquidating assets or by creating a repayment plan. Bankruptcy laws also protect financially troubled businesses. If bankruptcy is the end goal, a bankruptcy discharge is a legal tool used to accomplish it, Credit Karma says.

A bankruptcy discharge is a permanent court order that releases the debtor from personal liability for certain specified types of debts, the U.S. Courts says on its website. This means the debtor is no longer legally required to pay any debts that are discharged.

However, not all debts can be discharged, according to the U.S. Courts. One of the most common types of nondischargeable debts is debts to governmental units for fines and penalties.

Section 523 of the United States Bankruptcy Code also exempts from discharge “any debt… for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by… false pretenses, a false representation, or actual fraud.”

“Generally speaking, penalties are nondischargeable—not forgiven—in bankruptcy,” said Robert Lawless, a law professor at the University of Illinois Urbana-Champaign College of Law.

Gregory L. Germain, a law professor and the director of the Bankruptcy Clinic at the Syracuse University College of Law, agrees. 

“Bankruptcy would not allow [Trump] to keep his property and ‘get out’ of his liabilities,” said Germain. “But it would stay [put on hold] enforcement actions while the bankruptcy process takes place.”

In an email, Germain explained that the primary purpose of a bankruptcy filing would be to utilize the automatic stay to prevent New York state Attorney General Letitia James (D-N.Y.) from seizing Trump’s personal and corporate assets while he pursues his appeal. An automatic stay is a legal mechanism that pauses the collection of a judgment during an appeal.

“Upon filing bankruptcy, an automatic stay goes into effect to prevent creditors from enforcing their judgments. The attorney general would have unsecured claims against the bankruptcy estates which would have to be dealt with in the bankruptcy cases,” Germain said. 

But the claims against Trump’s estate would not disappear if he filed for bankruptcy, according to Germain.

“I presume the filings would be under Chapter 11, and the claims would have to be dealt with in the plan of reorganization if not reversed on appeal,” Germain said.

Although several of his previous companies have gone bankrupt, Trump has repeatedly bragged about the fact that he has never declared personal bankruptcy. If he were to do so in this case, the enforcement of the judgment against him wouldn’t go away; it would only be paused. But Adam J. Levitin, a professor of law and finance at Georgetown University Law Center, says such a drastic step is unlikely.

“Bankruptcy would have a lot of unappealing aspects for Trump and the Trump Organization,” Levitin told VERIFY in an email.

Levitin says if Trump and the Trump Organization were to file for bankruptcy, they would have to make public disclosure of all of their assets and liabilities. They would also require court approval for undertaking any transactions outside of the ordinary course of business and they would risk the appointment of an independent trustee to manage their assets.

“Bankruptcy would also create a public image/messaging problem,” Levitin said.

Trump has until March 25 to either pay the $454 million civil fraud or buy a bond covering the full amount. In the meantime, interest on the judgment continues to mount, adding roughly $112,000 each day.

The Associated Press contributed to this report.