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The Five Things that Divorce Attorneys Must Know about Bankruptcy

  LLOYD M. NOLAN

ATTORNEY AT LAW

225 SOUTH MERAMEC

SUITE 512

CLAYTON, MISSOURI 63105

www.lnolanlaw.com

(314) 725-1880

FAX 725-1882

*Licensed in Missouri

and Illinois

 

 

WHAT THE FAMILY LAW LAWYER NEEDS TO KNOW ABOUT BANKRUPTCY

 

 

  1. The Automatic Stay

Upon the filing of a bankruptcy petition, an automatic stay is entered pursuant to Section 362(a) of the Bankruptcy Code. This stay prevents the commencement of continuation of lawsuits against the debtor, and creditors cannot institute or continue collection efforts against the debtor.

11 U.S.C. Section 362 PROVIDES

 

(a)Except as provided in subsection (b) of this section, a petition filed under section 301302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of—

(1)the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

(2)the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;

(3)any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;

(4)any act to create, perfect, or enforce any lien against property of the estate;

(5)any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;

(6)any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;

(7)the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and

(8)the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.

 

****(b)The filing of a [ BANKRUPTCY] petition under section 301, 302, or 303 of this title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970, DOES NOT OPERATE AS A STAY

 

(1) under subsection (a) of this section, of the commencement or continuation of a criminal action or proceeding against the debtor;

 

(2)under subsection (a)—

 

(A) of the commencement or continuation of a civil action or proceeding

 

(i) for the establishment of paternity;

 

(ii) for the establishment or modification of an order for domestic support obligations;

 

(iii) concerning child custody or visitation;

 

(iv)for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate; or

 

(v) regarding domestic violence;

 

(B) of the collection of a domestic support obligation from property that is not property of the estate;

 

(C) with respect to the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute;

 

(D) of the withholding, suspension, or restriction of a driver’s license, a professional or occupational license, or a recreational license, under State law, as specified in section 466(a)(16) of the Social Security Act;

 

(E) of the reporting of overdue support owed by a parent to any consumer reporting agency as specified in section 466(a)(7) of the Social Security Act;

 

(F) of the interception of a tax refund, as specified in sections 464 and 466(a)(3) of the Social Security Act or under an analogous State law; or

 

(G) of the enforcement of a medical obligation, as specified under title IV of the Social Security Act;

 

** A “domestic support obligation” is defined in Section 101(14A) of the Bankruptcy Code to include any obligation owed to or recoverable by a spouse, former spouse, or child of the debtor … 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 …. without regard to whether such debt is expressly so designated;”

 

 

****REMEMBER in Chapter 13, collection of domestic obligations, beyond current support  are stayed because all property of the debtor is property of the estate, including future earnings of debtor during the plan, unless the plan or confirmation order provides otherwise.  11 U.S.C. Section 1306

 

 

  1. RELIEF FROM THE AUTOMATIC STAY – Order of Relief is Necessary to proceed in an action for Dissolution of Marriage

 

11 U.S.C. 362 (d)

 

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—

(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;

(2) with respect to a stay of an act against property under subsection (a) of this section, if—

may determine for cause by order entered within that 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later

 

Bankruptcy Courts liberally grant relief from stay in order to avoid entangling the federal court in family law matters. In re MacDonald, 755 F.2d.  715, 717 (9th Cir. 1985).

 

The order should provide that:

 

 

 

NO FEE IF BY CONSENT. CHAPTER 13 vs. CHAPTER 7

 

Chapter 7 – should obtain consent of the Bankruptcy Trustee – since it can involve property of the estate … NOTE: a Chapter 7 case is typically concluded in 90-100 days from the date of filing.

 

**** IN ST. LOUIS AREA, CHAPTER 13 LAWYER SHOULD FILE MOTION FOR RELIEF TO PURSUE DISSOLUTION AT NO CHARGE TO CLIENT

 

 

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  1. WHAT DEBTS CAN, AND WHAT DEBTS CANNOT, BE DISCHARGED

 

11 U.S. Code § 523 – Exceptions to discharge

 

 (a)A discharge under section 72711411228(a)1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt— [for] ….          

 

***(5) for a domestic support obligation;

 

** A “domestic support obligation” is defined in Section 101(14A) of the Bankruptcy Code to include any obligation owed to or recoverable by a spouse, former spouse, or child of the debtor … 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 …. without regard to whether such debt is expressly so designated;”

 

****(15) 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;

 

 

Accordingly, A discharge under section 727 … of this title does not discharge an individual debtor from any debt …

 

(5) for a domestic support obligation; … [or]

 

(15) 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.

 

11 U.S.C. Section 523(a), (15)

 

 

DIVORCE DEBTS ARE NO LONGER DISCHARGEABLE IN CHAPTER 7 CASES – PERIOD!!

 

See: Henderson v. Henderson, 389 S.W.3d 260, (Mo.App. E.D. 2012).

 

 

Several courts have held the “hold harmless and indemnify” language is no longer required. In re Shepard, Case No. 7-07-10497 SA. Adv. Pro. No. 07-1177s (Bankr. N.M. June 28, 2008). In re Wodark, BAP No. 09-049 (BAP 10th Cir. March 22, 2010); In re Burckhalter,389 B.R. 185 (Bankr. D. Colo. 20080.

 

 

HOLD HARMLESS AND OTHER LANGUAGE MAY STILL BE VALUABLE!!

ESPECIALLY IF THE DEBTOR SPOUSE FILES FOR RELIEF UNDER

CHAPTER 13

 

In addition to “hold harmless and indemnify language” it may be advisable to recite that payment of certain debts are deemed to be in the nature of support, and to be considered non-dischargeable as a “domestic support obligation” in the event of a future bankruptcy.

Especially, if the debtor spouse later files for relief under Chapter 13.

 

 

 

The determination of whether a debt is “alimony, maintenance, or support” is a matter of federal bankruptcy law rather than state law. Jodoin v. Samayoa, 209 B.R. 132, 137-138 (BAP 9th Cir. 1997); In re Moeder, 220 B.R. 52, 54 (BAP 8th Cir. 1998); Colon v. Gallegos, 1998 WL 787194 (Bankr. N.D. IL 1998)(Squires, J.); Haas v. Haas, 129 B.R. 531, 536 (Bankr.N.D.IL 1989). In making this determination, the Court must look to the substance of the obligation and not to labels imposed by state law. But state law is not irrelevant and may provide relevant guidance. The bankruptcy court has the power and discretion to conduct an independent review of the divorce decree and factual inquiry into the true nature of any support. Jodoin v. Samayoa, 209 B.R. 132, 138 (BAP 9th Cir. 1997). The fundamental inquiry then becomes whether the intent of the divorce court and the ex-spouses was to provide support or divide marital property. In re Woods, 561 F.2d 27,29 (7th Cir. 1977); In re Moeder, 220 B.R. 52, 55 (BAP 8th Cir. 1998) (the crucial issue is the intent of the parties and the function the award was intended to serve at the time of the divorce); Colon v. Gallegos, 1998 WL 787194 (Bankr. N.D. IL 1998)(Squires, J.). In determining whether a debt is in the nature of support/maintenance or whether it is properly characterized as a division of property, courts have considered the following factors: whether the obligation terminates upon the death or remarriage of either spouse (termination of the obligation indicates the obligation was for support); whether the obligation is payable in a lump sum or in installments over a period of time (obligation spread over time indicates the obligation was for support); whether the payments attempt to balance the parties’ income (payments to balance income indicate the payments were for support); the characterization of the obligation in the divorce decree (obligations described as support indicate the obligation was for support); the placement of the obligation in the decree (obligations under the heading support indicate the obligation was for support); whether there is any mention of support payments (separate mention of support payments indicates the obligation is not for support); whether there are children who need support (if children are of the age when support is required, this indicates the payments may be for support); whether there is a large differential in net income (a large differential in income would indicate the payments were for support); whether the obligation was thought to be taxable to the recipient (payments thought to be taxable indicate the payments were for support); and waivers of maintenance. See In re Woods, 561 F.2d 27, 29-30 (7th Cir. 1977); Colon v. Gallegos, 1998 WL 787194 (Bankr. N.D. IL 1998)(Squires, J.).

 

 

CHAPTER 13 CASES

 

11 U.S.C. Section 1328 (Chapter 13 Discharge)

 

(a) …. as soon as practicable after completion of all payments required under the plan…. and after such debtor certifies that all amounts payable under [ domestic support orders] … have been paid … the court shall grant the debtor a discharge of all debts provided for by the plan ……, EXCEPT for any debt —

 

(2) of the kind specified in section 507(a)(8)(C) or in paragraph (1) (B), (C), (2), (3), (4), (5), (8) or (9) of Section 523(a).

 

WHAT THIS MEANS IS THAT A DOMESTIC SUPPORT OBLIGATION IS NOT DISCHARGEABLE IN CHAPTER 13, BUT A DEBT PURSUANT TO A DISSOLUTION JUDGMENT, DECREE OR SEPARATION AGREEMENT

[As referred to in 11 U.S.C. Section 523(a)(15)] CAN STILL BE DISCHARGED IN CHAPTER 13 PROVIDED ALL OTHER REQUIREMENTS ARE FULFILLED

 

UNLESS,

 

The property division debt is determined to be A DOMESTIC SUPPORT OBLIGATION  UNDER 11 U.S.C. 523 (a)(5)  … (please reference notes and case law above.)

 

COMPLAINT TO DETERMINE DISCHARGEABILITY

 

*** Complaint must be filed within the time set forth in the Notice of Commencement of the case

 

*** Deadline is 60 days from date of the initial meeting pursuant to 11 U.S.C. Section 341 **

 

ADVERSARY COMPLAINT – NECESSARY WITHIN DEADLINES

 

BANKRUPTCY COURT IS NOT BOUND BY LABELS, HOWEVER THEY CAN MEAN A LOT.

 

11 U.S.C. 523 – The burden is on the proponent/creditor to establish that the debt is not dischargeable

 

The issue is to be determined by FEDERAL BANKRUPTCY LAW, NOT State Law

 

Bankruptcy Court is not the exclusive interpreter of Federal Bankruptcy Law

 

See: Henderson v. Henderson, 389 S.W.3d 260, (Mo.App. E.D. 2012).

 

The real issue in Chapter 13 Cases is to determine whether a Divorce Debt is a

Domestic Support Obligation under 11 U.S.C. 523(a)(5) and NOT DISCHARGEABLE in Chapter 13 OR, whether it is Property Division Debt under 11 U.S.C. 523 (a) (15) and, therefore, DISCHARGEABLE in Chapter 13.

 

When determining whether a debt represents a Support Obligation or a Property Division Debt, Courts tend to look at several factors:

 

  1. Does the Judgment, Decree or Agreement state that the Obligation is in the Nature of Support. Things tend to be what they say they are

 

  1. Whether the Other Party is (or was) in Need of Support from the Debtor. If so, the debt is more likely a support obligation.

 

  1. Does the obligation terminate upon Death, Remarriage or Emancipation of a Child. If so, it is more likely to be deemed a Support Obligation.

 

  1. The Number of Payments. Smaller payments over time tend to be deemed support obligations, whereas a lump sum payment is more likely considered a Property Division debt.

 

  1. Disparity of income or earning power. If the debtor earned significantly more at the time and/or if the non-debtor spouse had minimal income and could not likely afford the burden of the debt, it is more likely to be found a Support Obligatio