Family Law

A REMINDER THAT THE WORLD OF BANKRUPTCY HAS CHANGED

By Fox Rothschild

Attorneys in our firm recently taught a seminar on the preparation of marital settlement agreements.  The seminar touched upon the subject of bankruptcy and its effect upon obligations undertaken as part of a divorce settlement.  We have noted also that in reviewing property settlement agreements prepared by our colleagues at the bar, many have not become familiar with the changes brought about in this area by the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act.  This statute effectively changed the law relating to bankruptcy as it affected divorce in ways that should be familiar to every attorney practicing domestic relations law.

The most sweeping change is found at Section 523. In a nutshell it declares that any discharge under Sections 7, 11,12 and 13 of the Bankruptcy Code shall not affect any debt to a spouse, former spouse, child of the debtor that is incurred in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of court.

This language is not discretionary and abandons the 'balancing test' by which Bankruptcy Courts could examine debts in proceedings before October, 2005.  It says plainly that the debtor cannot alter this kind of debt no matter how onerous the obligation may be.

A 2007 US District Court case from Arkansas underscores the point.  In re Tommy N. Douglas involved a debtor who had been ordered to pay off certain debts on behalf of his spouse and he as part of their divorce.  He encountered emotional and financial problems following the divorce and eventually sought relief under Chapter 7, the liquidation section of the Bankruptcy Code.  Among other things he asked for relief from the obligation to pay the joint indebtedness.  But after analyzing the statue and commentary offered by the Hon. William Houston Brown in his treatise titled Bankruptcy and Domestic Relations Manual (2006), the Court held that even though this kind of obligation would have been dischargeable in proceedings before the divorce, once it became part of the divorce decree, the Bankruptcy Court lost any power to discharge it. The Court notes that as part of the Chapter 13 filing, the Court can alter the payment in accordance with an approved plan.

The core point to be taken from this case is that divorce obligations take on a higher significance than almost any other form of debt.  And even in situations where the duty to pay was not direct contractual one, but derived through the action of the divorce court , the stamp of the divorce court or the taint of a domestic relations obligation takes the obligation out of a bankruptcy court's jurisdiction to alter.

The interesting wrinkle to the language is the avoidance of language encompassing obligations in a premarital agreement. Is a debt undertaken by a person before marriage an obligation 'in connection with a divorce'?  This appears to be an open question and one that may spawn future litigation.

Full post as published by Pennsylvania Family Law on March 13, 2009 (boomark / email).