Bankruptcy

Unhappily Ever After: Family Law Issues in Bankruptcy

By Stephen Sather

This paper was originally presented to the West Texas Bankruptcy Institute on October 29, 2010.

Love and marriage,
Love and marriage
Go together
Like a horse and carriage
This I tell you brother
You can't have one without the other

--Frank Sinatra

While love and marriage may go together, divorce and bankruptcy are frequently companions as well. Spouses who have had financial difficulties prior to divorce will find that they only get worse once they split up. Then there are the couples who enjoy fighting so much that they will take the battle to any court they can find. The Bankruptcy Abuse Prevention and Consumer Protection Act shifted the battlefield in several areas, some of which are obvious and others of which are more subtle. This paper will examine the intersection between family law and bankruptcy law in the case of three recurring fact patterns:

(a) The couple who has gotten divorced where one spouse files bankruptcy to try to escape the consequences of the divorce (the ?Pursued Ex-Spouse?);

(b) The couple who is still together where only one spouse files bankruptcy (the ?Dilemma of the Non-Filing Spouse?); and

(c) The couple who transfers assets to the non-filing spouse (the ?Friendly Break-Up).

However, before getting into the specific scenarios, it is necessary to define some terms. There are two types of marital-related debts in bankruptcy: Domestic Support Obligations and everything else. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 replaced the prior category of alimony, maintenance and support with the newly defined term of Domestic Support Obligation. The defined term ?Domestic Support Obligation? appears in 11 U.S.C. §362(b)(2), 507(a)(1), 523(a)(5), 1129(a)(14) and 1325(a)(8).

Under 11 U.S.C. §101(14A):

This definition contains a lot to digest. However, at its core, it still covers alimony, maintenance and support. The following chart summarizes the boundaries of a Domestic Support Obligation (DSO):

Non-DSO marital debts are only referenced in 11 U.S.C. §523(a)(15). It applies to debts owed:

Using the same format, Non-DSO marital debts can be summarized as follows:

I. The Pursued Ex-Spouse

The best advice that you could give to someone contemplating bankruptcy to escape obligations arising from a divorce is don?t. Generally bankruptcy will afford very little relief from divorce-related obligations and in some cases a debtor will be much worse off in bankruptcy court than in state court.

A. The Automatic Stay

The first thing that the Pursued Ex-Spouse will notice is that many actions related to a divorce may continue to proceed notwithstanding the automatic stay. Under 11 U.S.C. §362(b)(2), the automatic stay does not apply to:

Most aspects of a divorce proceeding are not subject to the automatic stay. The non-bankruptcy court can issue orders establishing or modifying DSOs, establishing child custody and visitation and dissolving the marriage. The only thing that the non-bankruptcy court cannot do is determine the division of property of the estate.

If a DSO is already owed, §362(b)(2)(B) provides that wage withholding may continue and the creditor may collect the DSO from property that is not property of the estate, such as post-petition earnings in a chapter 7 proceeding or exempt property. In one recent case, the Bankruptcy Court found that a DSO creditor?s attempts to collect from exempt property did not violate the automatic stay because the debts were non-dischargeable and the automatic stay contains an exception for collecting DSOs from property which is not property of the estate. In re MacGibbon, 383 B.R. 749 (Bankr. W.D. Wash. 2008).

Section 362(b)(2)(C) goes further, allowing withholding from property of the estate under a judicial or administrative order or statute. In re Gellington, 363 B.R. 497 (Bankr. N.D. Tex. 2007)(although finding that garnishment by state violated confirmed chapter 13 plan).

In another case, the Court found that the State?s suspension of the debtor?s driver?s license for failure to pay support fell within the exception of section 362(b)(2)(D). In re Penaran, 424 B.R. 868 (Bankr. D. Kan. 2010).

B. Dischargeability of Divorce-Related Obligations

The Pursued Ex-Spouse will also learn that it is difficult if not impossible to discharge marital debts. The provisions governing dischargeability have evolved substantially over the years. When the Bankruptcy Code was adopted in 1979, obligations for alimony and support were non-dischargeable, but property settlement debts could be discharged. In 1994, the Bankruptcy Code was amended to include 11 U.S.C. §523(a)(15), which provided that divorce debts other than alimony and support would be non-dischargeable if a timely adversary proceeding was filed and a balancing test was not met. Finally, in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 amended Section 523(a)(15) to eliminate the balancing test as well as the requirement to file an adversary proceeding. Thus, property settlement debts have gone from being always dischargeable to never dischargeable.

Given the broad scope of Sections 523(a)(5) and (a)(15) are there any marital debts which can be discharged in bankruptcy?

1. One narrow exception is that non-DSO marital debts may be discharged in chapter 13 proceedings, but not chapter 11 cases. Under 11 U.S.C. §1328(a)(2), debts under Section 523(a)(5)(DSOs) are expressly made non-dischargeable, but there is no similar provision for Section 523(a)(15). In re Young, 425 B.R. 811 (Bankr. E.D. Tex. 2010). On the other hand, 11 U.S.C. §1141(d)(2) provides that the discharge of an individual chapter 11 debtor does not extend to any debts covered by Section 523.

2. Some courts have found that third party debts are dischargeable. Prior to BAPCPA, the Fifth Circuit took an expansive view of what debts could fall within §523(a)(5), finding that debts owed to third parties, such as attorneys and guardians were nondischargeable so long as they were in the nature of support. Matter of Hudson, 107 F.3d 353 (5^th Cir. 1997); Matter of Dvorak, 986 F.2d 940 (5^th Cir. 1993). While the Fifth Circuit has not addressed the amendments made to §523(a)(5), several lower courts have found that the reference in the amended statute to debts ?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? excludes debts owed to anyone not mentioned. Section 523(a)(15) is even more narrow, referring to debts owed to ?a spouse, former spouse or child.?

In one case, the Court found that ?(t)he Plain Meaning rule requires that assignees, like attorneys, are excluded from protection accorded members of the immediate family.? In re Thompson, 2009 Bankr. LEXIS 2985 (Bankr. D. Md. 2009)(construing §523(a)(15)). Judge Michael Lynn has also taken a plain meaning approach to the parties covered by sections 523(a)(5) and (a)(15). In a case involving a claim by a debtor?s ex-spouse to recover attorney?s fees, he noted that the law firm was not one of the parties listed in the statute.

In re Brooks, 371 B.R. 761, 764-65 (Bankr. N.D. Tex. 2007). Judge Lynn reached the same result in a case involving a claim by an attorney ad litem, finding that an attorney ad litem was not the same as a guardian and thus was not covered by the statute. In re Densmore, 2009 Bankr. LEXIS 3416 (Bankr. N.D. Tex. 2009).

However, other courts have found that BAPCPA did not change prior case law which did not limit claims to the specific persons listed.

In re Andrews, 2010 Bankr. LEXIS 2071 (Bankr. W.D. Ark. 2010) at 11-12. Interestingly, Andrews suggests that the reason the attorney?s fees would be non-dischargeable is because they would take money needed for support away from the spouse, so that in the event that the spouse was not liable for the attorney?s fees (such as if limitations had run), that the fees might not be support. Other post-BAPCPA cases treating debts to parties not specifically named as non-dischargeable include In re Blackwell, 2010 Bankr. LEXIS 1918 (Bankr. M.D. Fl. 2010); In re Burnes, 405 B.R. 654, 659 (Bankr. W.D. Mo. 2009); In re Johnson, 397 B.R. 289, 296 (Bankr. M. D. N.C. 2008). While there is not definitive appellate precedent yet, the broad view of sections 523(a)(5) and(a)(15) seems to be the majority position at this time.

3. A debtor?s obligation to pay attorney?s fees to her own lawyer did not qualify as a DSO. In re Young, 425 B.R. 811 (Bankr. E.D. Tex. 2010).

4. A debtor?s obligation to refund excess payments of child support did not qualify as a DSO. In re Vanhook, 496 B.R. 296 (Bankr. N.D. Ill. 2010). In this case, the non-debtor paid child support to the debtor until it was determined that he was not the parent. At that point, the state court ordered repayment of the child support. While the obligation to pay child support was in the nature of alimony, maintenance or support, the repayment order was not.

5. While a hold-harmless agreement in a pre-petition divorce decree could be non-dischargeable under §523(a)(15), a hold harmless with regard to debts previously discharged in bankruptcy proceeding was an improper attempt to re-impose liability. In re Heilman, 430 B.R. 213 (9^th Cir. BAP 2010). The court rejected the argument that the post-petition divorce decree imposed a new obligation.

C.

Full post as published by A Texas Bankruptcy Lawyer's Blog on November 01, 2010 (boomark / email).