Security deposits are not the landlord’s property and are considered to be held in trust for the tenant’s benefit. The general rule is that if the debt is non-dischargeable in bankruptcy, the civil penalty is non-dischargeable. Seventh Circuit case on point is In re McGee, 353 F.3d. 538 (7th Cir. 2003). Obligation to return security deposit nondischargeable under section 523(a)(4), defalcation while in a fiduciary capacity. If you look at the District Court opinion, 2003 WL 1989641, 2003 U.S. Dist. LEXIS 7208 (N.D.Ill. Apr. 30, 2003) you will find a discussion of whether the penalties are also nondischargeable.T he general rule is that if the debt is nondischargeable, so are the penalties and attorney’s fees, and that was the result in this case as well.
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