Bankruptcy & Divorce: A Disruption In The Force

family law bankruptcy collide

When bankruptcy law and family law intersect, the result can be liberating or disruptive, depending on the timing of a bankruptcy filing and the goals of  the parties.

An infinite number of combinations lead to infinite different outcomes.

The variables start with whether bankruptcy occurs before or after status is altered; before or after the division of the property; the choice of chapter; whether the case is joint or solo; whether claims of third party creditors are involved, and so on.

Rather than look at all the possible combinations of those variables, I propose to focus on the powers and provisions of the Bankruptcy Code that impact financial aspects of divorce.

Understand what those five statutory forces are, and you can better anticipate, utilize, or avoid their impact.  This discussion focuses on California law where exemptions and community property is involved.

Some bankruptcy basics

First, a bird’s eye view of the territory.

Without delving too deeply, here are some bankruptcy basics:

• Spouses can, but don’t need to, file bankruptcy together.
• Only spouses can file a joint case.
• One can file a bankruptcy case even if not eligible for a discharge in that case.
• With three exceptions, bankruptcy impacts the assets owned and the creditors existing at filing.
• The administration of a bankruptcy estate may extend long beyond the entry of the debtor’s discharge.
• The right to file bankruptcy cannot be barred by contract or court order.

Bankruptcy powers that matter in family law

Five characteristics of bankruptcy law explain most of what happens when bankruptcy and divorce collide.

I. The Supremacy Clause

The essential disruption emanates from the Supremacy Clause.

This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing [sic] in the Constitution or Laws of any State to the Contrary notwithstanding.

Bankruptcy law is found in Title 11 of the US Code. In general, bankruptcy starts with the debtor’s property rights as determined  by state law.  By reason of the Supremacy Clause, federal law determines how those state law rights are impacted or altered by a bankruptcy filing.

One of the possible alterations is the bankruptcy court’s ability to relabel financial obligations. A debt characterized as property division may be found to be, in fact, support under bankruptcy law. Shaver v. Shaver, 736 F.2d 1314, 1316 (9th Cir. 1984). “The court must look beyond the language of the decree to the intent of the parties and to the substance of the obligation.”

Using that power to recharacterize obligations, bankruptcy courts have found each of the following to be ” in the nature of support”:

● Non filer’s attorney fees: Trentadue, 527 B.R. 328 (Bankr. E.D. Wis. 2015)
● Child’s guardian ad litem: Chang, 163 F.3d 1138 (9th Cir. 1998)
● Mortgage payments for the ex’s residence: Maitlen, 658 F.2d 466 (7th Cir. 1981)
● Debts of the ex: Williams, 703 F.2d 1055 (8th Cir. 1983)
● Education expenses of children, even beyond majority: Boyle, 724 F.2d 681 (8th Cir. 1984)

In the course of the divorce, tax considerations may drive the characterization of debts as support or division of property. Following the characterization used in the divorce in subsequent tax returns does not, apparently, enjoin a spouse from successfully arguing for a different characterization of the debt in bankruptcy. Kritt, 190 B.R. 382 (9th Cir. BAP 1995).

So, the label used in a divorce settlement may not control if one party ends up in bankruptcy.

II. Property of the estate

The second statutory force that impacts planning for divorce is the sweep of “property of the estate”.  An “estate” is created when a bankruptcy case is filed; Section 541 defines what assets and legal rights become property of the bankruptcy estate.

Bankruptcy defines “property” expansively as “all legal or equitable interests of the debtor in property as of the commencement of the case”.  §541(a)(1). The statute goes on to add to the estate all property that the trustee recovers by use of avoiding powers and the profits from any assets that are property of the estate.

Whereas in a dissolution, a spouse is entitled to half of the community, in bankruptcy, all of the community property becomes property of the estate, even when only one spouse files bankruptcy.

All interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is—
(A) under the sole, equal, or joint management and control of the debtor; or
(B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable. §541(a)(2).

Because all of the community is property of the bankruptcy estate, a creditor of either spouse whose claim can be paid under state law from community property can file a claim in the case.  So, even the creditors of a non filing spouse can participate in the bankruptcy case of the non-liable spouse.

If the community property has not been divided, a bankruptcy filing by one spouse or ex spouse brings all of the community into the bankruptcy estate.  A change in marital status doesn’t alter the liability of the undivided community for debts, and therefore for inclusion in the bankruptcy estate.

In Chapter 7, a liquidation proceeding, bankruptcy law puts the bankruptcy trustee in control of all of the community property and any separate property that belongs to the debtor. If the community includes an operating sole proprietorship, most trustees reflexively want to close the business, at least until the trustee understands the risks of continued operation.

Note that tax items such as net operating losses and capital gains exclusions on the sale of primary residences are property of the estate and available to the Chapter 7 trustee. 26 U.S.C. 1398(g).

In contrast to dissolution proceedings, the community property presumption of California Family Code 2581 with respect to the family home does not control in bankruptcy. Reed, 89 B.R. 100 (CD Cal. 1988); Rund v. R.F.F. Family P’ship, LP (In re Eberts), 2014 Bankr. LEXIS 119.

Bankruptcy cases for decades have held that when a spouse files alone owning a family home in joint tenancy, only the debtor’s one half interest becomes property of the bankruptcy estate.  That treatment was rejected in Brace, decided by the 9th Circuit Bankruptcy Appellate Panel in January, 2017.

Brace held that the community property presumption for property acquired during marriage trumped the presumption arising from the form of title.  The case is currently on appeal to the 9th Circuit.

Whether the co owner is a spouse or unrelated, a bankruptcy trustee has the power to sell jointly owned property. § 363(h). A non debtor owner shares the transaction costs of the sale, but gets his share of the net proceeds (and any tax consequences that flow from the sale).

Earnings from post filing personal services are not property of the estate and belong to the debtor, free of claims of the trustee or creditors. Income traceable to work done pre petition, as in a sales commission on a deal pending at filing, is part of the bankruptcy estate.

Bankruptcy law excludes altogether from its ambit certain kinds of property held by the debtor, like pensions and 401(k)’s; spendthrift trusts; and property where the debtor has only bare legal title. § 541(b).

Two significant exceptions to the “bankruptcy estate as a snapshot as of filing” principle are found in §541(a)(5). Proceeds of life insurance or property acquired by bequest, devise, or inheritance within the six months after the commencement of a bankruptcy case are property of the estate.

➴ If bankruptcy is seen as a possibility, attention to the debtor as beneficiary or heir of others is warranted.

Note that acquisitions by the debtor via trust are not within the ambit of “bequest, devise, or inheritance”.  Zimmerman v. Spencer, 306 B.R. 328 (CD Cal. 2004).

III. Exemptions

The debtor’s ability to remove property from the bankruptcy estate with the use of exemptions is the third statutory force that impacts spouses and ex spouses.

bankruptcy exemptionsWhile (nearly) everything the debtor has comes into the estate, some part of those assets exit the estate by the operation of exemptions. §522. Exemptions define the quantum of value in assets that is safe from the trustee and the creditors.

California has opted out of the federal bankruptcy exemptions, providing instead two alternative exemption systems in the Code of Civil Procedure. The standard California exemptions found in CCP 704, with the substantial homestead exemption, are available; a separate scheme available only in bankruptcy is found in CCP 703.  Debtors must choose one system or the other.

One federal bankruptcy exemption does apply to California filers, despite the state opt out: a whooping $1,000,000 plus exemption for IRA retirement accounts. § 522(n).

Exemptions are claimed in the debtor’s schedules and become final 30 days after the date conclusion of the first meeting of creditors.
Nothing about the operation of bankruptcy law operates to determine the division of exempt property between spouses. Allowed exemptions simply define what isn’t any longer property of the bankruptcy estate.

If the exempt property was community property, it remains community property, subject to state law. Relief from the automatic stay may be necessary to effect a division of exempt property between the spouses.

A married debtor filing alone can claim the entire homestead exemption to protect equity in a residence in which the debtor lives as of the filing. McFall 112 B.R. 336, 341 (9th Cir. BAP 1990). The exemption is also available in situations where it is the debtor’s spouse or dependents, rather than the debtor, who lives in the home.

Property claimed exempt is forever protected from claims of creditors existing as of the commencement of the case except claims for taxes and support. §522(c).

Bankruptcy law empowers the debtor to avoid judicial liens that impair an exemption. §522(f).  The debtor can recover funds levied pursuant to a judgment.

However, liens securing debts between spouses arising from the division of property in divorce are shielded from avoidance by the construct that the debtor acquired his interest in the former marital property simultaneously with the imposition of the lien. Farrey v. Sanderfoot, 500 U.S. 291 (1991).

IV.  Avoidance Powers

avoidance powerThe power to unwind certain transfers that were otherwise complete as of the filing of the bankruptcy case is  the fourth statutory power that impacts divorce.

The bankruptcy code endows the trustee in a Chapter 7  (and the debtor in a Chapter 11 or 13) with avoidance powers.  The media talks about the power to “claw back” payments made before bankruptcy.

The most commonly used of those avoiding powers, found in Sections 544-549 of the Bankruptcy Code, involve preferences and fraudulent transfers.
Preferences: While California law gives a debtor the right to pay one creditor in preference to others, bankruptcy law allows the trustee to recapture preferential payments made within 90 days of filing on account of legitimate debts where the transaction is outside the normal course of business or financial affairs. The claw-back period is extended to 1 year for transfers to insiders, including family. Cases go both ways as to whether an ex is an insider.

For the purposes of the avoiding powers, the perfection of judicial lien is a transfer subject to avoidance as a preference in a bankruptcy case filed within 90 days of its perfection. In situations where a creditor has obtained a judgment lien, a temporary protective order, or even a levy, marital property can be freed of the lien in a timely filed bankruptcy.

Fraudulent transfers: the trustee has avoiding powers under §548 of the bankruptcy code as to fraudulent transfers.  The trustee also acquires the state law rights of a creditor to avoid such transfers under §544.

Transfers may be avoidable if they are made with actual intent to defraud creditors, or if they are constructively fraudulent (the transferor gets less than reasonable equivalent value for the item transferred.)

In the broadest strokes, gifts are fraudulent transfers. Bargain sales are fraudulent transfers. One doesn’t have to intend to deprive creditors of their due to render a transfer voidable.
Bankruptcy courts have long held that an uneven division of property between the spouses can be a fraudulent transfer. Roosevelt v. Ray (In re Roosevelt), 176 B.R. 200 (B.A.P. 9th Cir. 1994).

More chilling is the recent decision in Beverly, where an equal division of property which resulted in the debtor’s share of the community consisting of exempt assets, and the non filing spouse’s share the non exempt assets, was invalidated. The ugly facts of that case were replete with the debtor’s intent to render himself collection proof, but the concept that an equal division with an unequal effect should one spouse file bankruptcy is concerning.

V. Discharge

The elimination of personal liability for a debt via a bankruptcy discharge is the fifth bankruptcy “power” that stands to influence a divorce.

The foundational premise of the Bankruptcy Code is that creditors will have their debts discharged or excepted from discharge without action on their part. A creditor does not have to file a claim or appear at the first meeting of creditors to affect the treatment of his claim for the purposes of the discharge.

The exceptions to discharge are found in §523, and qualified for Chapter 13 in §1328.

BAPCPA, the 2005 bankruptcy “reform” act, provided a new definition for what we commonly call support.

A “domestic support obligation” is a debt owed to a spouse, former spouse, or child that is “in the nature of alimony, maintenance, or support…without regard to whether such debt is expressly so designated”. §101(14A).

A debt determined to be DSO is not dischargeable in any chapter of bankruptcy and has a first priority for payment from a bankruptcy estate.

The Chapter 13 discharge is more expansive than the chapter 7 discharge.

While debts “incurred in the course of a divorce…” join DSO as being non dischargeable in Chapter 7, those non-support debts are dischargeable in Chapter 13.

The obligation to indemnify a former spouse created in a divorce from debts of the marriage will survive a Chapter 7 discharge, but be eliminated in a successful Chapter 13.

Certain other classifications of debts are nondischargeable IF the creditor files a timely adversary proceeding in the bankruptcy case and succeeds in proving the factual basis required to except the debt from discharge.

Broadly, those classes of debts requiring affirmative action by the creditor to establish non-discahrgeability include debts incurred by

  • fraud;
  • conversion, embezzlement and breach of fiduciary duty; and
  • debts resulting from willful and malicious behavior.

The fiduciary duty that spouses owe one to another may form the basis for a non dischargeability action by one spouse against the other. Arguably, that debt is one incurred by reason of marriage and not by reason of the divorce and thus subject to discharge absent a timely filed adversary seeking exception to the discharge.

bankruptcy dischargeIn a no asset Chapter 7, which covers about 96% of individual 7’s, even a creditor not listed in the debtor’s schedules is discharged, unless their claim is grounded in the “bad acts” exceptions to discharge.

The discharge affects the personal liability of the debtor for his debts. Absent some additional action in the bankruptcy court, liens pass through a bankruptcy case unaltered. Thus a mortgage lien survives even when the borrower is no longer personally liable; a tax lien continues as a charge against the debtor’s assets.

Whether a tax lien attaches to assets acquired after the filing depends on whether the underlying tax is discharged or not. If the tax debt survives, the lien attaches to new acquisitions.

Bankruptcy has a special discharge provision that affects community property found in §524(a)(3).  Just as all of the community property comes into the bankruptcy estate, even when only one spouse files, and all community claims regardless of which spouse incurred them participate in the case, upon discharge, all community property including after acquired community property is exonerated of exposure to those pre filing community claims.

Debts discharged in bankruptcy do not trigger a tax liability for forgiveness of debt; there is a statutory exception for bankruptcy in federal tax law.

Harnessing the Force

The forces of bankruptcy, the Supremacy Clause; expansive property of the estate;  exemptions; avoidance powers; and the scope of the discharge exert their influence when a marriage is dissolved.

The earlier in the divorce process the parties consider the possible impact of those forces, the better they can control the outcome.


Images are courtesy of Pixabay and Alan Cleaver.

Shadow Players May Have Support Claims In Bankruptcy

shadow peopleWhat we know so far about domestic support obligations in bankruptcy is that they are non dischargeable and the bankruptcy court has the last word as to what is and is not support.

But we just scratched the surface in looking at support when we considered obligations from one spouse to another.

Debts owed to an extended cast of supporting characters may be “support” as well, non dischargeable and carrying a priority for payment.

Supported party’s professionals

While support to a former spouse may be a monthly obligation, don’t overlook family court orders that one spouse pay a fixed sum to the other party’s lawyer.  If based on need or disparity between the financial capacity of the spouses, that award of the other party’s attorneys fees  may be in the nature of support as well.  Anderson, 300 B.R. 831 (WD NY).

You can expect that attorneys fees incurred to establish, modify, or collect support will themselves be found to be in the nature of support.

Professionals appointed to represent the interests of minor children may have claims that are in the nature of support.  In Chang, the 9th Circuit held that the state court order requiring payment by the debtor to the child’s guardian ad litem was non dischargeable support, despite the fact that the statute on its face speaks of debts owed “to” a spouse or child.  The nature and purpose of the fees here were held to be a debt to the child.  Chang, 163 F.3d 1138 (9th Cir. 1998).

Payments to other third parties

Bankruptcy courts have found that judgments requiring payment by the debtor of obligations to third parties whose claim arose quite outside the divorce proceeding to be support:

Mortgage payments:  debt service on the house the ex spouse lives in may be support.  Maitlen, 658 F.2d 466 (7th Cir. 1981).

Payment of spouse’s debts:  obligation may be support despite label as “property settlement”.  Williams, 703 F.2d 1055 (8th Cir. 1983)

Educational expenses of children: such obligation may be support even if the expenses will be incurred after the offspring reaches the age of majority.  Boyle, 724 F.2d 681 (8th Cir. 19840

Public benefits provided children  State’s claim to recover overpayment in aid to children held to be DSO; Anderson 439 BR 206.  watch also for govermental expenses for children in protective or punitive custody.

Why the determination may not matter

Having spent all this time working out whether a debt is support, and therefore non dischargeable, in many of your cases for a debtor in a no asset  Chapter 7 case, it doesn’t matter.

Enter Section 523(a)(15), making non dischargeable debts

 to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit;

So, if the debt is incurred to (or “for the benefit of”  we can add in light of the case law) a spouse or child in the course of a separation or divorce, it isn’t dischargeable, regardless of its characterization.

But, wait! wait!  There’s more:

Section 523(a)(15) isn’t included in the debts not dischargeable in Chapter 13!

So, the issue of whether an obligation is a domestic support obligation is chiefly important in Chapter 13, where it would be dischargeable without necessarily being paid in full, or, in a Chapter 7 asset case, where the non dischargeable support obligation might be paid in full or in part.

With that, we’ll call it quits, and take up more about family law in bankruptcy cases another time.

The Bankruptcy Family Law Series:  ♦ Spouses as source of Conflicts   ♦ Starting with support

Image courtesy of Wikimedia.

Married: Assorted Bankruptcy Exemption Issues


Our series on family law and  bankruptcy continues with an exploration of a mixed bag of exemption and property-of-the-estate questions colored by the fact the debtor has been married.

Non debtors claim exemptions

Section 522(b) opens with a provision that the debtor may exempt from the property of the estate property described in the section or in applicable state law and non bankruptcy law.

That seems unexceptional until you get to the associated rule, FRBP 4003.  If the debtor fails to claim exemptions or file Schedule C, a “dependent of the debtor” may file the list within 30 days of the due date.  For the purposes of §522, a spouse is a “dependent” whether or not actually dependent.

Whether the debtor’s failure arises from inadvertence or deliberation, those dependent on him can step into the breach.

The same kind of concern for the debtor’s choices exists in California, where we have two systems of exemptions available to debtors in bankruptcy.  To choose the system with the grubstake rather than the generous homestead exemption, the debtor must get a waiver of the homestead exemption from the non filing spouse.  CCP 703.140(a)(2).

Unpaid support past and future

The Bankruptcy Code provides an exemption for the debtor’s right to receive support.  11 USC 522(d)(10(D).  Importantly, that exemption is limited to the amount necessary for the support of the debtor and the debtor’s dependents.

Only a minority of states offer the federal exemptions, so the operative answer where you practice is found in state exemption law. Surprisingly to me, California’s classic, state law exemption system in CCP 704 has no exemption for support;  the California bankruptcy exemptions in CCP 703.140 has an exemption that mirrors the federal bankruptcy exemptions.

Look for any line of cases in your jurisdiction that takes up the alternative argument that a right to spousal support is not a property right that comes into the estate under §541.  Such cases include Wise, 346 F.3d 1239 (10th Cir.); Jeter, 257 B.R. 907(BAP 8th Cir.); Anders, 151 BR 543 (Bankr. D. Nev.).

Note, too, that while my introduction spoke of debtors who had been married, a right to support could exist without a valid marriage under domestic partnership law or other provisions of state law.

Claims for support trump exemptions

We turn next to the debtor’s liability to pay for the support of another.

Pre petition debts for support are not only not dischargeable, they are enforceable against property exempted in the bankruptcy case.  §522(c) (1).

And if that wasn’t enough, the drafters provided that the liability of exempt property for support claims exists “notwithstanding any provision of applicable non bankruptcy law to the contrary…”  Take that, you scofflaw!

Which, of course, raises the question of post discharge enforcement of a support judgment, where state law provides an exemption, and federal law declares it isn’t enforceable.  But I’m not going there, til I have to. 

Liens for support unavoidable

The Code’s pattern of protecting non debtor’s claims for support continues with respect to prepetition liens.  A lien securing a support claim, though a judicial lien, cannot be avoided on the grounds it impairs an exemption. § 522(f)(1)(A).

Protection for former spouses grows even larger when you consider Farrey v. Sanderfoot, the Supreme Court’s decision of 1991.  In a Wisconsin divorce, the marital home was awarded to husband, subject to an equalizing payment to the wife, secured by the home.

Husband filed bankruptcy, claimed an exemption in the home and sought to avoid wife’s lien in her former home under 511(f).  Held, after a convoluted discussion of “fixing” a lien on an interest of the debtor, that the lien was not subject to avoidance.

The logical construct the court used, since the lien here didn’t really constitute support as described in §523(a)(5), was that the “interest of the debtor” in question came into being at the same time as the lien in favor of the former co owner (wife).

More in bankruptcy law/family law series

Let me know what family law/bankruptcy law questions perplex you.

In the meantime, here are the previous entries in this series.

The Bankruptcy Family Law Series:  ♦ Spouses as source of Conflicts   ♦ Starting with support  ♦ Shadow players with support claims   ♦ Non support debts & discharge   ♦When the stay rules change ♦Post discharge indemnification in single spouse filing

Image courtesy of Flickr and Andrew Morrell Photography



One Discharge, Two Spouses, And Third Party Creditors

crayons Flickr Randy HeinintzThe classic bankruptcy family law conundrum is whether to file bankruptcy before or after a divorce.

We think about about bankruptcy addressing the claims of third parties against the spouses.

But consider the impact of a bankruptcy discharge granted to one spouse prior to the resolution of the divorce.

What are the options and alternatives for the non filing spouse?

Our local Inn of Court considered this question with a local family law judge, a room full of bankruptcy practitioners and the two lawyers who’d argued this question to a family judge.

The facts were these:  during the course of a divorce, Wife filed Chapter 7 and received a discharge.  A year and a half later, as the division of assets and debts was at issue, Husband sought an order that Wife indemnify him from a joint debt.

Query:  could the family court order the debtor to indemnify the ex spouse with respect to a debt for which she had discharged her liability?

Full disclosure:  I represented Wife in the bankruptcy case and argued this issue to the family court.

I analyzed an indemnity obligation as running afoul of the discharge.

Husband’s counsel argued that a Chapter 7 discharge could not have discharged a debt she owed to her ex with respect to marital debts.

Afterward, both bankruptcy lawyers admitted that they had never considered the arguments made by the other.

The court held

The family law judge held for Wife:  her bankruptcy discharge barred the creation of an indemnification obligation with respect to a discharged debt.

The court relied on a 9th Circuit BAP decision Heilman.

What was startling to me was that this issue hadn’t been conclusively resolved by the courts.  After all, debtors have been marrying and divorcing for a long time.

Practice pointers

In candor, I wish I had solid practice pointers on this issue.

There are old cases that approach the issue of obligations between spouses from the point of view:  when does the claim of one spouse against the other arise.  Maybe it doesn’t arise before marital discord, or the initiation of a divorce action.  Yet in Heilman, the divorce was filed months after the bankruptcy.

The uncertainty here may argue that either the spouses file a bankruptcy together, or at least, that they both file.  That eliminates any disparity in the post divorce obligations to third parties of the spouses.

If the divorce had been completed before Wife filed her Chapter 7, any order for indemnification would have been non dischargeable.  If such orders had been made in the divorce, we might have opted for Chapter 13, where non support obligations to a spouse are dischargeable.

I asked the pupilage group whether an uneven division of the marital property in my case would have been a permissible approach to the disparities created by the discharge of one spouse.  Our collection of lawyers and judges hemmed and hawed.

Welcome to the strange and wonderful world of family law and bankruptcy.

The Bankruptcy Family Law Series:  ♦ Spouses as source of Conflicts   ♦ Starting with support  ♦ Shadow players with support claims   ♦ Non support debts & discharge   ♦When the stay rules change

Image courtesy of Flickr and Randy Heinitz


Domestic Support Obligations: When The Rules We Know Change

Automatic Stay In Family Court
As bankruptcy lawyers, we’d like to get the world trained to simply halt in their tracks when a bankruptcy is filed and the automatic stay is invoked.

It’s not so simple when there are family law proceedings afoot.

Automatic stay

Section 362(a) enjoins continuation of an action against the debtor to recover a claim or the enforcement of a judgment against the debtor or property of the estate.

Seems straightforward so far.

Then we hit the exceptions.

Support related exceptions

Excluded from the scope of the stay  by §362(a)(2) are actions

  • to establish or modify support
  • concerning custody or visitation
  • to terminate marital status
  • collecting support from assets not property of the estate
  • wage garnishment from property of the debtor
  • suspension of licenses granted under state law
  • interception of tax refunds due the debtor

With  BAPCPA’s advent in 2005, the exceptions to the stay were widened in almost every instance where collection or enforcement of a domestic support obligation  ( defined by §101 (14A))is involved. [Read more…]

Non Support Debts In Bankruptcy: Our Options Have Changed

Wrong Way
Read the case annotations for Section 523(a)(15)of the Bankruptcy Code casually, and you can go really wrong.

It’s like the phone tree admonition:  listen carefully because our options have changed.

Before 2005, the dischargeability of non support obligations to former spouse or child incurred by the debtor in the course of divorce might be dischargeable, based on a weighing of the hardships.

If the non filing spouse missed the deadline to file an adversary proceeding for a determination of the dischargeability, the debt was wiped out.

No more.

Changed by bankruptcy reform

Debts, not in the nature of support, incurred in divorce to a spouse, child, or former spouse are now flat out non dischargeable. [Read more…]

How Bankruptcy Courts Deal With Alimony and Support

child support Fotolia_51994629The starting place for our exploration of bankruptcy and family law is support.

Whether it’s called alimony, maintenance, or support, any amounts due at the commencement of a bankruptcy case are non dischargeable.

Actually, since BAPCPA, it’s called a domestic support obligation.  It got a statutory definition, as well:

(14A) The term “domestic support obligation” means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest…  that is—

(A) owed to or recoverable by—
(i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or

(ii) a governmental unit;

(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;

(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of—
(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and

(D) not assigned to a nongovernmental entity…   §101(14A)

Section 523(a)(5) makes a domestic support obligation non-dischargeable.  That message is echoed in §1328(a)(2).

So, if it’s a domestic support obligation, it can’t be discharged.

Is it really support

Just when it looked simple, you need to acknowledge the power of the bankruptcy court to look past the labels that the former spouses or the family court attached to an obligation.  Those labels don’t necessarily control the characterization of a debt.

For example, in Shaver, 274 F.2d 1314, the 9th Circuit upheld a Montana bankruptcy court dealing with a divorce decree entered in Indiana, by which the non debtor spouse got $197,000 payable over 10 years in satisfaction, said the decree, of the wife’s “marital and dower rights”.   Payments would end if the wife died during that 10 years.  Despite the label, it was non dischargeable support said the court.

Likewise, the debtor’s divorce obligation to pay the taxes on the half of his military retirement benefits awarded to his wife of 31 years was likewise found to be in the nature of support when the debtor filed Chapter 13.  Denis, 25 F.3d 274.

Even in the face of a state court denial of spousal support in a short term marriage, the 9th Circuit BAP found that the award to the non debtor spouse of  $185,000 in attorneys fees incurred in a custody battle to be in the nature of support.  Gionis, 170 B.R.  675.

Bankruptcy courts will generally look at both the intent of the parties, the function the payments serve, and any events that terminate the obligation to pay, such as remarriage or death in determining if an obligation is support.

No relief from existing order

Clients sometimes appear with an old support order on which there is an outstanding balance.  Despite changes in the spouses’ relative prosperity since the order was made, your prospective client has not returned to family court to get relief from the support order.

The client is unlikely to get relief from that order in bankruptcy court.  While bankruptcy courts are not constrained by collateral estoppel when it comes to the characterization of payments flowing (or not flowing) between ex spouses, the bankruptcy court will not typically revisit the amount of the periodic obligation.

If such relief is necessary, it has to be obtained from the family court or the party to whom the support is now owed.

Next time, we’ll look at the bankruptcy treatment of amounts owed to attorneys and other professionals as a result of proceedings in family court.