Married: Assorted Bankruptcy Exemption Issues

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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

 

 

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