Bankruptcy and Family Law

Bankruptcy is something no one wants to think about, but it is becoming more commonplace when parties are thinking of separating and divorcing.  One household becomes two, with two sets of bills and less income to support each household. Often, the stresses that lead to a bankruptcy action are also marital stressors. If you are contemplating a separation or divorce and are thinking of filing for bankruptcy, make sure that you consult with both a bankruptcy attorney and family law attorney before filing any actions in either matter.

This article aims to address the most basic bankruptcy questions facing divorcing couples and is not intended to serve as a substitute for advice from a qualified professional.  Bender LeFante Law Offices has worked with many bankruptcy attorneys over the years and understands that our family law clients who are either going through a bankruptcy or have a spouse going through a bankruptcy, or who have a business which may be going through a restructure or bankruptcy action have special needs which must be addressed in a timely manner or they may be lost.

If you or your spouse anticipate that bankruptcy may become a factor in the dissolution of your marriage, please seek advice from a qualified bankruptcy attorney and be sure that the bankruptcy attorney knows and understands your family law situation.  It is also imperative that you inform your family law attorney of any pending or probable bankruptcy action by you or your spouse so that appropriate steps can be taken.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (hereinafter “BAPCPA”) became effective October 17, 2005.  It was designed to reduce the loopholes contained in prior bankruptcy statutes and to encourage the repayment of debts as opposed to discharging the bulk of a person’s debts.  Under BAPCPA, certain debts are non-dischargeable, but others are able to be discharged.  Therefore, it is important to know which apply to your domestic situation.

Once a debtor files a petition for bankruptcy, almost all court actions against the debtor are “stayed” or suspended until the bankruptcy process has been completed.  There are a few exceptions to this automatic stay which, with regard to family law issues include actions for:

  1. The establishment of paternity
  2. Child custody or visitation
  3. The establishment of or modification of an order for alimony, maintenance, or support
  4. The dissolution of a marriage – however, no action may proceed for the division of property that is property of the bankruptcy estate
  5. Domestic violence

If you want to file a court action to consider any of the above issues, it is not necessary to seek relief from the automatic bankruptcy stay.  However, if you want to file an action for something such as a division of the marital property, you must be granted relief from the automatic bankruptcy stay prior to filing your action, or, if the action was filed prior to the bankruptcy petition being filed, you must be granted relief from the bankruptcy stay prior to proceeding with your action.

Perhaps the most frequently asked bankruptcy question involving a domestic situation is whether awards for child support and alimony (or other form of spousal support) are allowed to be discharged in bankruptcy.  The simple answer is “no,” although this does not guarantee that the person receiving the support will continue to do so.  A discharge in bankruptcy would that the debtor does not have to pay the debt owed and that the creditor cannot take any measures to try to enforce collection of the debt, but, under BABCPA, certain categories of debts are not allowed to be discharged.  Included in the list of debts that cannot be discharged are: (1) domestic support obligations (or DSOs), and (2) any debt “to a spouse, former spouse, or child of the debtor [that is not a DSO] 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 court record, or a determination made in accordance with State or territorial law by a governmental unit.”

A domestic support obligation is defined by BAPCPA as:

  • (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 accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, 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, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.

Any child support or spousal support obligation that is set out either in a separation agreement, property settlement agreement, or in a court order qualifies as a domestic support obligation.  DSOs are not dischargeable in bankruptcy, and they are given a priority status over other unsecured creditors.  BAPCPA takes additional steps to protect child support obligations by requiring that the bankruptcy trustee notify the child support recipient of the right to use the services of a state child support enforcement agency to aid in collecting child support during and after the bankruptcy case.  The bankruptcy trustee must also provide the recipient with the address and telephone number of the child support enforcement agency and explain the recipient’s right to payment under the applicable bankruptcy chapter filed by the debtor.

Although support payments are an important consideration to divorcing parties, the division of their property is, perhaps, equally as important.  The BAPCPA does not provide the same levels of protection to the non-filing spouse when it comes to property.  If the non-filing spouse is named as a creditor in the bankruptcy action and does not do anything to object to the claim, the right to divide property at all may be gone forever.  It is very important for the debtor to name the other spouse as a creditor in the bankruptcy action or, on the other hand, for the non-filing spouse to actively pursue and protect his or her right to divide the marital property by objecting to the claim. Not all family law attorneys understand bankruptcy law and not all bankruptcy attorneys understand family law.  It is important that you inform each attorney of the existence of the other action and ask that the attorneys speak with one another to insure that all rights are protected and all avenues pursued.

Even if the non-filing spouse files a timely objection, the automatic bankruptcy stay applies to actions for property division.  In order to move forward with an existing property division claim, or to file an original property division claim, the creditor spouse must seek a relief from the stay with the bankruptcy court. This step is crucial to protect the marital property in its present form. The claim may only proceed if the relief from stay is granted.  If not, the property division must wait until the bankruptcy is complete, which in the case of a Chapter 13 bankruptcy may be several years.

Any property that is exempt from the bankruptcy estate may be divided, but usually property division incorporates the entire scope of assets and debts of a married couple, as opposed to select assets and debts.  Additionally, if certain debts are discharged in bankruptcy, the debtor is no longer liable for those debts, which would affect the net value of the marital estate.

Jointly held debt poses a particular problem if a bankruptcy discharges one debtor while the other spouse remains liable on the debt. If you believe that a spouse awarded certain debt in an agreement or order may file for bankruptcy, it is imperative that the non-filing spouse be removed from the liability prior to the filing of the bankruptcy. However, on the reverse side of the same issue, if a large debt is held in the name of only one party, that party may file bankruptcy while leaving the remainder of the marital estate intact, at a significant savings to the non-filing party. In these cases, it is important for the family law attorney and bankruptcy attorney to work together.

It is important to note, the automatic stay applies to property divided by the parties themselves pursuant to a separation or property settlement agreement.  If you and your spouse have agreed to a property division and one of you files for bankruptcy, you must obtain permission from the bankruptcy court prior to any transfer of title or division of the property since the property is likely to be property of the bankruptcy estate. Proper planning can prevent this difficult and unnecessary situation.

In summary, a bankruptcy filing directly affects several aspects of a separation and divorce.  Whether you are the creditor spouse or debtor spouse, you should seek the advice of a qualified bankruptcy attorney familiar with the family law aspects of bankruptcy law. The best outcomes are usually achieved when your bankruptcy and family law attorneys work together to protect your interests.

11 U.S.C. § 523(a)(15)

11 U.S.C. § 101 (14A)