The Effects of Filing Bankruptcy During Divorce
By : Brad Frakes | Category : Divorce |
9th May 2014
Upon filing any bankruptcy petition (chapter 7, 11, 12 or 13) an automatic stay immediately goes into effect without any notice to creditors, prohibiting all efforts to pursue collections against the debtor or against the debtor’s estate.
This does NOT apply to specific domestic support orders issued in a divorce or paternity proceeding. Specifically, parties can still go forward with the following:
(1) the establishment of paternity;
(2) the establishment or modification of an order for domestic support obligations;
(3) concerning child custody or visitation;
(4) the dissolution of a marriage, except for the purpose of division of property determined to be in the marital estate;
(a) Of the collection of a domestic support obligation from property that is not property of the estate;
(b) For payment of a domestic support obligation under a judicial or administrative order or a statute;
(c) The withholding, suspension or restriction of a driver’s license, a professional license, or a recreational license, under State law;
(d) The reporting of overdue support owed by a parent to any consumer reporting agency;
(e) The interception of a tax refund;
(f) The enforcement of a medical obligation (health insurance).
Petitions for Contempt:
Civil contempt is an attempt to collect a debt. The automatic stay may prevent the litigation of a civil contempt charge. Criminal contempt may proceed, regardless of the automatic stay, as long as it is not determined to be an attempt to collect a debt, veiled as a punitive proceeding.
If an award of attorney’s fees in paternity, divorce or post-divorce litigation has been awarded, but not collected, the automatic stay applies to their collection. If the award of attorney’s fees is specifically styled in the language of the Order or Decree to be inseparable from an award of alimony, they may be exceptions to the automatic stay.
Division of Marital Property and the Debtor’s Estate:
The Bankruptcy Court retains jurisdiction to determine whether the State Court’s division of property adversely impacted the Bankruptcy Code’s scheme for payment of obligations under a Chapter 13 plan. In re Dryja, 425 B.R. 608 (Bankr D. Colo. 2010) The State Court (Divorce Court) may determine the separate property interests of the non-debtor spouse, however, the automatic stay remains intact as to the property interests of the bankruptcy estate. In re Montague, 2009 WL5178453 (Bankr. M.D. N.C. 2009) Further, the automatic stay not only prevents the creditor from attempting to collect against the debtor spouse and the bankruptcy estate, but also stays collection attempts as to the other spouse.
Sanctions for Violation of Automatic Stay:
In a paternity, divorce or post-divorce adversarial proceeding can be issued sanctions by the Federal Bankruptcy Court if they violate the automatic stay. Willful violations may result in substantial monetary damages. In re Caffey, the mother of the debtor’s child willfully violated the stay by having the debtor incarcerated for non-payment of child support after she had knowledge that he had filed bankruptcy (assumedly civil contempt). After filing a complaint in bankruptcy court, the debtor was awarded emotional distress damages of $5,000; recovery of attorney’s fees; and, punitive damages of $5,000 were awarded against the creditor’s attorney in the domestic litigation.
Abstention of Bankruptcy Court:
Often the bankruptcy court will choose to relinquish jurisdiction when necessary in order to avoid interference with a state court’s jurisdiction. Often in chapter 13 plans, the Trustee will lift the automatic stay to allow debtors to pay child support directly to the other parent, rather than through the plan. This can only be done when (a) the debtor has never been behind in funding his chapter 13 plan; (b) child support is not scheduled to terminate during the pendency of the bankruptcy; and the debtor has no child support arrearages. One common reason for this lift of the automatic stay is because it usually takes 2-3 months for payments occur through a claim and this allows for child support payments to begin immediately. However, the debtor cannot receive a discharge of a chapter 13 plan if there are arrears for the child support obligation. All arrears must be paid in full.
Exceptions to Discharge of Particular Debt; Section 523 Bankruptcy Code:
These exceptions include domestic support (alimony, spousal maintenance and child support) and certain debts arising out of divorce or separation, other than domestic support. Complaints to determine the dischargeability of debts covered by Section 523 MUST be raised by a creditor within 60 days of 1st scheduled meeting of creditors. A Marital Dissolution Agreement provision of non-dischargeability of specific debts, other than direct alimony and child-support, are unenforceable when they purport to except such a debt from discharge. In re Adkins, 151 B.R. 458, (Bankr. L. Rep.) held that the federal bankruptcy court must decide the issue of dischargeability after a bankruptcy is filed, not the prior agreement of the parties, or the divorce court. The State Courts where the divorce decrees were filed lacked jurisdiction prior to a bankruptcy filing to determine dischargeability.
Intent of Parties and State Court:
The intent of the parties or the State Court in the Marital Dissolution Agreement or Order is what the bankruptcy court will look to. When determining the intent of the parties or state court, the bankruptcy court will look to the following factors;
(1) Did the agreement or order specifically provide for any other form of alimony or support?
(2) Are there minor children in need of support;
(3) Is there an imbalance of income and expenses;
(4) What was the length of the marriage;
(5) Does the obligation terminate upon death or remarriage of the recipient spouse;
(6) Are the payments periodic in nature;
Other Specific Non-Dischargeable Domestic Relations Expenses:
Education expenses of a minor child are usually held to be considered support in nature and non-dischargeable. This is unique in that state law would usually consider this a contractual agreement of the parties and not a support obligation, especially if it is for college expenses after the age of majority. Medical expenses for minor children will also usually be considered support in nature and non-dischargeable. The debtor’s obligation to maintain life insurance on himself has been considered a support obligation to provide future security for either alimony or child support and non-dischargeable. Attorney’s fees and costs imposed in connection with a divorce or post-divorce action between former spouses are usually held to be in the nature of support and non-dischargeable. There has been an exception when the attorney’s fees are to be paid directly to the attorney, as it is reasoned that the former spouse is no longer liable for the debt and it is, therefore, not a support provision.
For more information on divorce, visit: https://bradfrakesfamilylaw.com/family-law-nashville/divorce/