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Archive for the ‘Bankruptcy And Divorce’ Category

The Surprising Benefits: Chapter 13 Potentially Discharges Divorce Property Settlement Debts

September 10th, 2018 at 7:00 am

Chapter 13 can write off some or all of the non-support debts included in your divorce. But it comes with some potential disadvantages. 


Last week we explained how Chapter 7 cannot write off non-support divorce debts, but Chapter 13 can. We said if you owe a significant debt created by your divorce decree (for other than child or spousal support) you should talk with a bankruptcy lawyer. Don’t necessarily think that Chapter 13 is your best option with this kind of debt. Chapter 13 has advantages and disadvantages. We get into these now so you can start to see which option is best for you.

Non-Support Divorce Debts

Support debts are not discharged (written off) under either Chapter 7 or 13. Only non-support debts can be discharged under Chapter 13 (and not Chapter 7). So we need a quick, practical reminder what we mean by non-support debts.

We said last week:

Most non-support debts are those obligations in your divorce decree related to the division of property and the division of debts between you and your ex-spouse.

The Division of Property

… often in a divorce one ex-spouse receives less assets than the other. For example, you may receive a vehicle worth much more than your ex-spouse. Or you may get the family home. So you’re required to pay your ex-spouse half of the equity in the home to make up the difference. Whatever specific amount you’re required to pay in these kinds of situations is a non-support divorce debt.

The Division of Debts

Also, for whatever reason your divorce decree may have required you to pay a debt arising from the marriage. This debt may be a jointly-owed one, one that you owe individually, or even one that only your ex-spouse owes. The decree orders that your ex-spouse no longer has to pay that marital debt. You have to pay it by yourself.

… . This obligation by you to your ex-spouse to pay the debt is a non-support divorce debt.

Disadvantages of Chapter 13

The main advantage of Chapter 13 for this kind of debt is that you could avoid paying most or even all of it. Also, Chapter 13 has many other potential advantages over Chapter 7, some of which may well apply to your situation. These are beyond the scope of today’s blog post.

Let’s focus instead on three main potential disadvantages of Chapter 13 for this kind of debt. These are: 1) delay in discharge, 2) risk of no discharge, and 3) likely partial payment of the nonsupport divorce debt.

Delay in Discharge

A Chapter 13 case takes a lot, lot longer than a Chapter 7 one. It takes years instead of months. That is, a Chapter 13 case usually doesn’t finish for 3 full years, and often goes as long as 5 years. Contrast that with a Chapter 7 case, which usually takes less than 4 months from filing date until completion.

And you don’t get a discharge of your debts—including the non-support divorce debt(s)—until the end of the case.  Again, that’s 3 to 5 years.

Usually your ex-spouse can’t do anything to collect on that debt in the meantime. So the delay may not be much of a practical problem. But you’re still living in a sort of limbo in the meantime.

If you have other reasons to be in a Chapter 13 case the delay may well be worthwhile. Or if the amount of you non-support divorce debt is very large that alone may make the delay worthwhile. Just be aware of this downside.

Risk of No Discharge

Almost all Chapter 7 cases, especially those in which the person is represented by a lawyer, get successfully completed. But Chapter 13s are riskier. That’s because they involve a monthly payment plan that you and your lawyer put together, it gets court-approved, and then you pay on it for 3-to-5 years. In the right situations a Chapter 13 case can accomplish much more than Chapter 7. But there are more things that can go wrong.

As we said above, you don’t get the discharge of debts until the end of the case. So you have to get to the end successfully to discharge the non-support divorce debt. There’s a risk that you would not get to the discharge.           

Likely Partial Payment of the Non-Support Divorce Debt

The Chapter 13 payment plan referred to above very seldom results in all debts being paid in full. In fact, in some cases you’d pay certain debts nothing before they get permanently discharged. In the majority of cases a non-support divorce debt would get paid in part, but often only a small percentage.

Non-support debts would be treated like all your other “general unsecured” debts. These are all debts that are not secured by collateral and are not “priority” debts (such as recent income taxes) which must be paid in full. All of your “general unsecured” debts are put together into a single pool of debt. The extent to which you’d pay that pool of debt would be based on a bunch of factors, such as:

  • how much you can afford to pay all your creditors per month throughout the length of the case
  • the length of your Chapter 13 plan, generally 3 years or 5, determined by your income
  • the amount of your priority debts, which you paid in full before the “general unsecured” debts get paid anything
  • how much your plan must pay in administrative expenses—the Chapter 13 trustee fees and the attorney fees you did not pay before your case was filed—all paid before paying any of the “general unsecured” debts

As a result sometimes the “general unsecured debts, including your non-support divorce debts, get paid nothing at all. All of your available money is exhausted elsewhere. (This assumes your local bankruptcy court allows such “0% plans”). On the other hand, in rare cases the “general unsecured” debts get paid in full. This is more common when you have little or no priority debts and the general unsecured debts are relatively small. Most of the time your non-support divorce debts get paid a relatively small portion of the total you owe. It depends on all these factors.

 

The Surprising Benefits: Discharge Divorce Property Settlement Debts

September 3rd, 2018 at 7:00 am

Chapter 13 enables you to discharge—legally write off—some or all of any non-support debts included in your divorce. Chapter 7 does not do this.

                               

“Discharging” a Debt or Legal Obligation

When you successfully complete a consumer bankruptcy, you get a discharge of some or all of your debts. When a debt is discharged the creditor is legally forbidden to take any action “to collect, recover or offset any such debt.” See Section 524 (a)(2) of the Bankruptcy Code. The debt has become legally uncollectible. So, one of your main goals in bankruptcy is to discharge all your debts, or as many debts as the law allows.

Chapter 7 vs. Chapter 13 Discharge

Chapter 7 “straight bankruptcy” discharges most debts. But there are exceptions.

Some debts you may want to continue paying and don’t want to discharge. One reason may be because you want to keep the collateral securing that debt. So, for example, you might legally agree to continue paying your vehicle loan in order to keep that vehicle.

Certain other debts the law does not allow to be discharged. Examples include child and spousal support, many student loans, and recent income taxes.

The kinds of debts that a Chapter 13 case does not discharge are mostly the same kinds as under Chapter 7.  These include the kinds mentioned above. You can voluntarily pay a vehicle loan under a Chapter 13 “adjustment of debts” case. (Plus you may well get some extra advantages).  And Chapter 13 does not discharge child and spousal support, many student loans, and recent income taxes. (Again, you may well get some major advantages under Chapter 13 in dealing with these special debts.)

However, there IS a significant kind of debt which Chapter 7 does not discharge but Chapter 13 does. These are non-support divorce debts. As a result you should consider Chapter 13 instead of Chapter 7 if you have this kind of debt. This is especially true if you owe a significant amount of non-support divorce debt. Chapter 13 would likely enable you to pay little or even none of your non-support divorce debts. If you either didn’t file bankruptcy or filed under Chapter 7 you’d be required to pay them in full.

What Are Non-Support Divorce Debts?

What we’re calling divorce debts are those financial legal obligations that arose out of your marital divorce. These can also come through separation decrees and other family court proceedings.

Non-support divorce debts are simply divorce debts not involving the payment of spousal or child support.

Most non-support debts are those obligations in your divorce decree related to the division of property and the division of debts between you and your ex-spouse.

The Division of Property

Your divorce decree may divide the marital assets in a very straightforward way. At the end of the divorce both of you could be in possession of what you’ve been awarded—all done.

But often in a divorce one ex-spouse receives less assets than the other. For example, you may receive a vehicle worth much more than your ex-spouse. Or you may get the family home. So you’re required to pay your ex-spouse half of the equity in the home to make up the difference. Whatever specific amount you’re required to pay in these kinds of situations is a non-support marital debt.

The Division of Debts

Also, for whatever reason your divorce decree may have required you to pay a debt arising from the marriage. This debt may be a jointly-owed one, one that you owe individually, or even one that only your ex-spouse owes. The decree orders that your ex-spouse no longer has to pay that marital debt. You have to pay it by yourself.

This provision in the decree creates a new and separate obligation by you to your ex-spouse to pay that debt. This is over and beyond whatever obligation you may have had (or not had) already directly to the creditor.

This obligation to your ex-spouse to pay the debt is a non-support marital debt.

Discharged Only Under Chapter 13

Chapter 7 case simply does not discharge these non-support debts.

You’d continue to owe any obligation to pay your ex-spouse money for division of marital property. You would continue to owe any obligation stated in the divorce decree to pay a marital debt. This would be true even if you could discharge the debt to the direct creditor.

However, both division-of-property and division-of-debts obligations to your ex-spouse (and any other non-support divorce debts) could be discharged in a Chapter 13 case. So, again, if you owe non-support divorce debts you should look into Chapter 13 with your bankruptcy lawyer.

But Chapter 13 isn’t necessarily your best option if you have a non-support divorce debt. Chapter 13 has disadvantages, both of itself and in how it treats non-support obligations in particular. We’ll get into these next week. Then you’ll begin to see whether Chapter 13 really is the better solution for you.

 

Family Court Proceedings and Debts in Bankruptcy

February 12th, 2018 at 8:00 am

Bankruptcy prevents or stops only certain limited divorce/family law proceedings. Others, including collection of ongoing support, continue. 

 

Our last several blog posts have been about creditor collection actions stopped or not stopped by a bankruptcy filing. Today we get into divorce and family court related proceedings and debts.

Family Court Proceedings

The bankruptcy law that stops creditor collections immediately when filing bankruptcy is called the “automatic stay.”

The automatic stay doesn’t just stop creditor phone calls, wage and bank account garnishments, and vehicle repossessions and home foreclosures. It also stops most creditor lawsuits from being filed and prevents ongoing lawsuits from continuing. This makes sense because a creditor’s lawsuit is clearly part of its efforts to collect its debt.

However, there are certain kinds of lawsuits that have little or nothing to do with collecting a debt. Many of such lawsuits are in family or domestic relations court. Bankruptcy law creates exceptions to the automatic stay to allow certain specific family court proceedings. Such proceedings can be started or continued regardless of your bankruptcy case.

Each of these specific exceptions to the automatic stay makes sense. These proceedings mostly deal with personal matters not pertaining to collecting a debt or taking an asset from you. They include court proceedings

  • to establish the paternity of a child
  • to establish or modify the amount of child or spousal support
  • to resolve issues of child custody or visitation
  • to address domestic violence

See Section 362(b)(2) of the Bankruptcy Code.

So, your ex-spouse/domestic partner or about-to-be ex-spouse/domestic partner can start or continue these specific kinds of proceedings regardless of your active bankruptcy case. So can somebody acting on his or her behalf (such as a state support enforcement department).

The Divorce Proceeding

The automatic stay also does not prevent or stop the divorce or dissolution of marriage proceeding itself. When you file a bankruptcy case it doesn’t affect an ongoing divorce proceeding or the filing of a new one.

But that’s not quite true on a practical level. The automatic stay DOES apply to and does stop what is a crucial part of most divorce proceedings. That’s the division of marital property and marital debt. If there is no marital property or debt being addressed in your divorce, if only the dissolution of the marriage is being adjudicated, then that proceeding can continue and the marriage can be dissolved, regardless of your bankruptcy case.

But if, as usual, there’s some property or debt to divide, the automatic stay stops that from going ahead.

The Bankruptcy Code excludes from the automatic stay “a civil action or proceeding… for the dissolution of marriage, except to the extent that such proceeding seeks to determine the division of property…  .” (See Section 362(b)(2)(A)(iv).)

That exception makes sense because of what bankruptcy deals with—property and debt. Chapter 7, especially, looks to your property and debts as of a certain point in time—your date of filing.  It would not be a very sensible use of court time for two courts to be dealing simultaneously with your property and debts. The bankruptcy court would be dealing with a fluid situation as the divorce court shifted the debtor’s property and debts. So, a divorce court is stopped from proceeding on these issues while the automatic stay is in effect.

Collection of Child and Spousal Support

(We’ve addressed the special situation of child and spousal support separately in a recent blog post so we’ll be brief here.)

The automatic stay does not stop the collection of ongoing child or spousal support in either Chapter 7 or 13.

Chapter 7 “straight bankruptcy” also does not stop the collection of prior unpaid support. But Chapter 13 “adjustment of debts” can stop prior unpaid support collection, IF you act proactively and with consistency. You must:

  • continue paying any  ongoing monthly support payments
  • arrange to pay all unpaid support current during your Chapter 13 payment plan
  • actually make the proposed and court-approved plan payments so that you do catch up on all unpaid support during your 3-to-5-year plan

 

A Caution about Severing Your Chapter 13 Case from Your Spouse

September 1st, 2017 at 7:00 am

If getting separated or divorced while in a Chapter 13 case, you’ll likely each need a new lawyer for independent advice about what to do.   

 

Last time we explained an important option for spouses filing a Chapter 13 together: “severing” their case into two if they later separate or divorce. That allows each spouse to do whatever they want to do with their side of the case. Each person can either continue in the Chapter 13 case, convert to Chapter 7, or dismiss out of bankruptcy altogether.

You should know about this severing possibility before filing your case because it’s good to know your future options. You need to know how much flexibility Chapter 13 has if your circumstances change. And you need to know the limits on that flexibility.

With this in mind there’s a practical consideration about case severing that we didn’t have room to discuss last time. That’s the fact that your bankruptcy lawyer may not be able to advise either of you once you’re getting divorced.

Conflict of Interest

Lawyers are not allowed to simultaneously represent two people who have interests that are in conflict with each other. Only if your interests are quite closely aligned so that the same legal solution (such as filing a Chapter 13 case) is the best for you both can one lawyer represent both.

That’s true even if the two of you are in somewhat different circumstances. Most of the time two spouses have at least slightly different circumstances. For example, each of you may have some debts that you individually owe, and other debts you jointly owe. You may own some assets individually and the rest own jointly with your spouse.

If your circumstances are very different from your spouse’s, one lawyer may not be able to represent you both. Just being married does not automatically mean there isn’t a conflict of interest between you. This might prevent joint representation by one lawyer even if you have the best marriage in the world.

For example, one spouse may have come into the marriage with a significant asset. The other spouse may owe multiple years of income tax debt predating the marriage. His tax debt and overall situation may by far be best handled in a Chapter 13 case. She may not need any bankruptcy, or a Chapter 7 case if her asset can be protected through an exemption. Because her primary interest may be to save her asset while his may be to get his taxes paid or written off through, their interests may be in conflict. Especially if he is pressuring to do something she’s reluctant to do, she may need her own lawyer to determine what is in her own best interest.

Conflict of Interest from Coming Divorce

Let’s assume the two spouses’ interests were aligned enough so that they filed a Chapter 13 together. They got independent legal advice if that was needed, but in any event they filed the case jointly. But now, a year or two into their 3-year case they’re getting divorced. Up until now throughout their Chapter 13 case one bankruptcy lawyer has been representing them.

At this point that single lawyer likely cannot keep representing both of them. That’s because almost for certain they have become each other’s legal adversaries. Their individual interests have come into conflict in two ways.

First, as to their prior debts, they are likely in conflict there. In the example above, to the extent his income taxes have not yet been paid off or written off through the Chapter 13 payment plan, he’ll want to take care of them. He’d likely want to finish the Chapter 13 case, presumably with some amendments to account for post-divorce finances. She’ll have no interest in those taxes since she is not liable on them. Her interest will be on protecting her significant asset, maybe by dismissing her side of the Chapter 13 case.

Second, divorce almost always generates its own new liabilities, one ex-spouse liable to the other. These may include child or spousal support, debt from division of assets, and obligations to pay certain joint or separate debts. A bankruptcy lawyer absolutely cannot give either person any advice about such matters because that would advance the interest of one spouse to the direct detriment of the other spouse.

Lawyer’s Advice about Severing the Case into Two

In practical terms, most couples getting divorced while in a Chapter 13 case will need to sever their case into two cases. Then each spouse can do what is appropriate for themselves in their separate cases.

When a case is very close to completion it may be appropriate to just finish the case.  In the above example, if the payment plan is just a month or two to completion it may serve both spouses to get the discharge of debts this would provide them.

Or similarly, it may make sense to convert the Chapter 13 case into a joint Chapter 7 case. That may be in each party’s best interest. The reason they filed a Chapter 13 case—such as to save the family home—may well no longer apply. So getting the relatively quick closure provided by Chapter 7 may serve both of them best.

But whether to sever the case into two, finish off the Chapter 13 case, or convert to Chapter 7, the original Chapter 13 lawyer cannot advise the spouses about these options. That’s because he or she owes a duty of loyalty to both individuals. And the lawyer can’t be loyal to two people who now have opposing interests.

The lawyer can’t advise them about the effect of these options on an asset owned or a debt owed by one of them. That’s because they now have opposing interests about that asset or debt.

Same thing is true with advice about the effect of their bankruptcy options on their upcoming divorce. Obviously the two have directly opposing interests about all aspects of their divorce. Their lawyer can say nothing whatsoever to them about how their bankruptcy options may affect their divorce.

The Lawyer Needs to Either Withdraw or Require Independent Advice

The bottom line is that in most cases the Chapter 13 lawyer has to withdraw from representing the spouses. Or at the least the spouses have to meet with and get advice from their own separate lawyers. Those two lawyers could very well then agree that both spouses would be served by the case being severed. They would authorize the original lawyer to file a motion to sever and then withdraw from representation. The two lawyers would then each take over representation in those two severed cases.

 In some limited situations those two lawyers might agree that both of the spouses would be best served by either completing the Chapter 13 case or converting it into a Chapter 7 case. They may authorize the original lawyer to take that action. But they would continue being available to provide their individual clients with independent advice as the Chapter 7 or  Chapter 13 case was completed.

 

The Option of Severing Your Chapter 13 Case from Your Spouse

August 30th, 2017 at 7:00 am

When deciding to file a Chapter 13 jointly with your spouse, realize that you can split that case later into two cases if you get divorced. 

 

A Chapter 13 “adjustment of debts” case usually lasts three to five years, and a lot can happen in that time. It is not likely worth filing jointly with your spouse if you already believe your marriage won’t last that long. Chapter 13 provides much relief. It can even help your marriage because of the financial pressure it can relieve. But the two of you still very much need to be on the same page to make it work.

You can believe in the stability of your marriage but you’d still be wise to want to know what happens to your Chapter 13 case if things don’t work out between the two of you.

Dismissal and Converting to Chapter 7

In the last two blog posts we’ve covered voluntarily dismissing your case, and converting it into a Chapter 7 one. Those two ways to end a Chapter 13 case may be appropriate if your marriage is ending.

You can almost always dismiss a Chapter 13 case, including a jointly filed one.

Bankruptcy law recognizes that a Chapter 13 case is a big commitment. To encourage you to make this commitment, the law allows you to freely leave it if you want to later.

So if the two of you get to the brink of divorce, your bankruptcy lawyer can file a simple motion for the dismissal of the case. It will almost certainly be granted quickly.

Once your joint Chapter 13 case is dismissed each person can decide what is best for him or her. Each can separately decide whether to file a new individual Chapter 13 case, a Chapter 7 “straight bankruptcy” case, or neither.

Or instead your joint Chapter 13 case can usually be converted into a joint Chapter 7 case.  With a separation or divorce on the horizon the reasons that Chapter 13 made sense earlier may no longer. For example, saving the family home from foreclosure may be both less important and less financially feasible. Converting the case into a Chapter 7 one can get it completed within another three or four months. That timing may work better with your changed circumstances. And Chapter 7 results in a discharge (legal write-off) of all or most of your debts. That would not happen with a dismissal of the Chapter 13 case.

Severing a Chapter 13 Case into Two Separate Cases

Your joint Chapter 13 case can also be “severed” into two separate Chapter 13 cases. This is routinely allowed by the bankruptcy court, especially if you and your spouse are separating or divorcing.

Once the case is severed into a separate case for each person, then each can independently do whatever is in his or her best interest.

One or both of you may have a good reason to continue under Chapter 13. One of you may have a vehicle being paid through favorable cramdown terms. Or there may be personal income taxes that one or both of you are paying through the plan without additional interest, penalties, or threat of collections by the IRS or the state. So either person could file a new amended Chapter 13 plan in his or her own case incorporating the changed personal and financial circumstances.

One or both of you may instead convert your half of the case into a Chapter 7 one. You’d do this if there’s no more reason for being in Chapter 13.

Or, after the case is severed into two, either person can dismiss his or her case. That might make sense if that person no longer needs bankruptcy protection.

 

“Property of the Estate” and Marital Property Division

June 7th, 2017 at 7:00 am

The 180-day rule also applies to marital property division, whether by agreement or court decree. 

 

Our last half-dozen blog posts have been about what’s in the “property of the estate” of your Chapter 7 case. This matters because you must protect whatever is “property of the estate” by a property exemption or you risk losing it.

Generally, everything you own at the moment you file your Chapter 7 case is “property of the estate.” The date of filing is usually crucial in determining what is and what is not. But as we’ve seen in the last three blog posts, if you come into property a few very special ways during the 180 days AFTER filing, that property is also “property of the estate.” We’ve covered property received through an inheritance, life insurance proceeds, and other death benefits. The idea is that if you come into money or property that soon after filing bankruptcy, the creditors have rights to it.

Property from Divorce Property Settlements and Decrees

Property that you receive through divorce is one last special way of getting property to which the 180-day rule applies.

The U.S. Bankruptcy Code says that “property of the estate includes “an interest in property” which “a debtor acquires or becomes entitled to acquire” within 180 days after filing bankruptcy “as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree.” Section 541(a)(5)(B) of the Bankruptcy Code.

In other words, if within the 180-day period you get rights to property through a divorce property settlement or decree, it’s “property of the estate.” Whatever you get is treated as if it was yours at the moment you filed your Chapter 7 case.  

An Example

Let’s assume you filed bankruptcy not long after filing for divorce. You and your ex-spouse had already agreed that you would each just get what you’d already split up. Your vehicle, household goods, and other personal effects all fit within the available property exemptions.

But there’s a problem. You received the family home in the divorce decree as expected. You didn’t think there was any problem with that. Assume you are allowed a homestead exemption of $50,000. (This varies greatly depending on your state.) You owe $150,000 on a $230,000 home. At the time you filed your case both you and your spouse owned the house. That allowed you to claim only half of the equity as yours, or $40,000 of the $80,000 total equity. This $40,000 fit within the $50,000 homestead exemption, so it seemed to be protected.

But when the divorce decree was entered into within 180 days of your bankruptcy filing, you became the sole owner. The home is then treated as if were all yours as of the filing date.

So now all $80,000 of equity is treated as yours, with the $50,000 homestead exemption insufficient to protect it. Your home would be in serious jeopardy.

Conclusion

Be sure to tell your bankruptcy lawyer if you are in the midst of any divorce-related negotiations or dissolution proceeding. In fact, in some states this might even possibly apply to unmarried cohabitating couple break-ups. If you have ANY situation in which you may receive something because of the end of a marriage or relationship, discuss it thoroughly with your lawyer.

 

Upcoming Property from a Divorce

December 9th, 2016 at 8:00 am

One special category of future assets in bankruptcy is property from a divorce—either from a property settlement agreement or court decree.  

 

Bankruptcy and Future Assets

Five blog posts ago we started this series on special assets about inheritances and life insurance proceeds. We referred to a special 180-day exception to the otherwise strong rule saying that you focus on assets that you own as of the day that you file your bankruptcy case.

This exception means that assets you acquire by inheritance or life insurance up to 180 days AFTER filing bankruptcy are treated as if you owned those assets at the time you filed your case. Section 541(a)(5)(A) and (C) of the Bankruptcy Code. This means the inheritance or life insurance proceeds could go to your creditors instead of into your pocket.

Property Acquired by Property Settlement Agreement or Decree

Notice how that reference to the Bankruptcy Code on that 180-day exception just now was to subsections 541(a)(5)(A) and 541(a)(C). Well, how about the subsection in between those two: 541(a)(5)(B)?

The 180-day exception applies there as well, this time to property (assets) acquired:

as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree…  .

Dealing with Divorce and Bankruptcy at the Same Time Is Complicated Enough…

Both divorce and bankruptcy deal with a lot of the same financial issues, including assets and debts. Divorce often shifts your assets and debts. That’s one reason that it’s often unwise to file bankruptcy right in the midst of a divorce. Bankruptcy, especially Chapter 7 “straight bankruptcy,” has trouble dealing with a moving target, with shifting assets and debts. Divorce creates that complicating moving target.

The 180-Day Exception

Just one of those complications is that you can’t just look at what your assets are when you file bankruptcy. You have to anticipate what else you may acquire through your divorce in the subsequent 180 days.

By Settlement Agreement, Interlocutory Decree, or Final Decree

To be clear, the law doesn’t just cover assets you get from your final divorce decree. It includes prior steps in the process, such as property settlements that you make with your spouse. It may also include court orders resolving just part of your divorce.

Conclusion

So be very careful if you’re in a hurry to get a divorce filed. Don’t make the understandable mistake of thinking that bankruptcy fixates only on what you own at the time of filing.

Also, just because you figure it’ll take a long time to finish your divorce, you might want to wait to start it. That’s because even though you might be fighting about child custody or spousal support for many months, the property settlement of the case or a partial decree on property could happen faster. If any of this happens within 180 days after filing bankruptcy, assets you expected to receive yourself could easily go instead to your creditors.

 

The Domestic Relations Exceptions to the Automatic Stay

October 21st, 2016 at 7:00 am

Even if you file bankruptcy certain actions can still be taken against you in divorce court, or about family law matters.

 

The automatic stay protection of bankruptcy stops—“stays”—the vast majority of creditor collection actions. But this automatic stay does not apply to certain very specific kinds of creditor actions. There are exceptions to this otherwise very fast and broad protection that filing bankruptcy gives you.

Our blog post a couple days ago was about the automatic stay exception for criminal proceedings. Bankruptcy does not stop, and essentially has no effect on any criminal proceeding. That’s true even though criminal proceedings often lead to criminal debts—fines, restitution, and other monetary obligations. This is a blanket exception to the automatic stay that applies to just about every criminal proceeding and criminal debt. See Section 362(b)(1) of the Bankruptcy Code.

Today we’re discussing another set of exceptions, the domestic relations (family court) exceptions to the automatic stay. These are much more limited and selective than the broad one for criminal proceedings. That is, certain kinds of domestic relations proceedings are not stopped by a bankruptcy filing, but others are.

Family Court Proceedings NOT Stopped by Your Bankruptcy Filing

Most of the kinds of family court legal proceedings that the automatic stay does not cover are very specific ones. Each of these specific exceptions to bankruptcy protection make sense. These proceedings are either urgent matters of personal safety for the ex-spouse, or deal with deeply personal matters not directly related to collecting a debt or taking an asset from you.

So, your ex-spouse, about-to-be ex-spouse, or somebody on his or her behalf, can start or continue the following limited proceedings.

  • to establish the paternity of a child
  • to establish or modify the amount of child or spousal support
  • to resolve issues of child custody or visitation
  • to address domestic violence

See Section 362(b)(2) of the Bankruptcy Code.

The Divorce Case Itself

The automatic stay also does not apply to a broader proceeding, the dissolution of marriage itself. An ongoing divorce proceeding can continue, or a new one can be filed, regardless of your bankruptcy filing.

However, the automatic stay DOES apply to and does stop what is often a crucial part of a divorce proceeding–the division of marital property and marital debt. That makes sense as well because that’s what bankruptcy deals with—property and debt. It would not be very sensible to try to deal with your property and debt in bankruptcy when those were in flux because of your divorce case.

Collection of Child and Spousal Support

The automatic stay does not stop the collection of ongoing child or spousal support. Your ex-spouse or a support enforcement agency can continue to collect by any legal means. This is true no matter what kind of bankruptcy you file.

Besides ongoing support, Chapter 7 “straight bankruptcy” also does not stop the collection of unpaid and previously accrued support arrearage. This means that under Chapter 7 your ex-spouse/support enforcement agency can start or can continue collecting all forms of support through means that can often include:

  • wage withholdings
  • garnishment of bank accounts
  • seizure of a tax refunds
  • suspension of your driver’s licenses (both regular and occupational)
  • suspension of virtually all other licenses issued to you by the government, including occupational and professional licenses, and often including even hunting or other recreational licenses.

In contrast, an “adjustment of debts” Chapter 13 filing CAN stop these aggressive methods of collecting unpaid support arrearage. Collection of ongoing child and spousal support can continue, but collection of the accrued arrearage must stop.

However, this stopping of arrearage collection only stays in effect in Chapter 13 as long you strictly follow some rules. Most importantly, if you still owe ongoing support you must starts making those monthly payments right away. Your Chapter 13 payment plan must also arrange to pay the support arrearage in full over time. And you must actually make the Chapter 13 plan payments so that you do in fact pay off the arrearage during your case.

 

The Chapter 13 “Super-Discharge” of Divorce Decree Debts

July 18th, 2016 at 7:00 am

Chapter 7 doesn’t write off any divorce-based debts. But Chapter 13 DOES write off non-support divorce debts.  

 

In our July 1 blog post we introduced a list of 10 ways that a Chapter 13 “adjustment of debts” can help you keep your home. Today we get into the 6th of those 10 ways. Here’s how we introduced this earlier:

6. The Chapter 13 “Super-Discharge” of Divorce Decree Debts

You can “discharge” (permanently write off) CERTAIN obligations arising out of a divorce decree in a Chapter 13 case.  You can discharge debts dealing with the division of property and the division of debt. These are debts that you cannot discharge in a Chapter 7 “straight bankruptcy” case. You CANNOT discharge child or spousal support—under either Chapter 7 or 13.

So if you owe a significant amount of non-support divorce decree debt, AND there isn’t already a lien on your home securing that debt, Chapter 13 could stop a lien from being imposed. The debt would be discharged at the end of your Chapter 13 case as a “general unsecured” debt. You’d prevent liens against your home. You’d not owe any non-support debt to your ex-spouse.

Here’s how this works in practice.

The Example

Assume that you own a home. You owned it before you got married and so you were awarded it in your recent divorce. During the last year of emotional and financial turmoil you fell 5 months behind on the $1,500 monthly mortgage. So you’re $7,500 behind and also did not pay the $2,000 property tax for this year.

On top of that the divorce decree ordered you to pay two things: 1) $10,000 to your ex-spouse for his or her share of the equity built up in the house during the marriage; and 2) two credit card accounts with a combined balance of $8,500, as your share of the joint debts. You do not have to pay any child or spousal support.

Assume also that you have $35,000 in other unsecured personal debts.

Given your current steady income, you could afford the $1,500 monthly mortgage payment, but not while paying everybody else. And you don’t have any means to catch up on that mortgage or the property taxes, considering the other debts that you owe. Paying the two joint credit cards would be extremely challenging, and the $10,000 completely impossible.

Chapter 7 Not Much Help

A Chapter 7 case does not directly help with the home mortgage or property taxes arrearage. It may still provide some practical benefit. If it discharges enough other debts you may be able to somehow afford to catch up on the mortgage and property taxes. But you are at the mercy of those two creditors as to how much time you’ll have to catch up.

Furthermore, Chapter 7 does not help at all on your two divorce debts.

First, it does not discharge the $10,000 debt to your ex-spouse. You would continue to owe it in full after a Chapter 7 case would be completed. Your ex-spouse would be able to place a lien on your home to force payment of that debt (assuming that he or she does not already have a lien on the home already).

Second, a Chapter 7 does discharge your personal liability to the two joint credit card creditors (totaling $8,500 in debt). But it does NOT discharge the separate obligation you have to your ex-spouse to pay those two cards. In other words, the credit card creditors themselves would not be able to sue you to make you pay. In fact they would be forbidden to do so. However, your ex-spouse would be able to make you pay based on the divorce decree. If you didn’t pay, he or she could sue you for payment, and put a lien on your home for your non-payment.

So, Chapter 7 may help only very modestly with the mortgage and property taxes, and not at all with the divorce debts. It does not help protect your home.

The Chapter 13 Solution

Chapter 13 helps infinitely more on the both the home debts and the divorce ones.

With the unpaid mortgage and property taxes, as long as you followed some reasonable rules you could have 3 years, or even as much as 5 years, to catch up. Throughout that time your home is protected from foreclosure and other collection efforts.

Even more impressive, the $10,000 debt to your ex-spouse is forever discharged at the successful completion of the case. Same thing with your obligation to your ex-spouse to pay the $8,500 in the joint credit cards—discharged.

More precisely, those $10,000 and $8,500 obligations would be lumped in with your $35,000 in other unsecured debts. You would only need to pay that combined $53,500 if and to the extent you could afford to do so.

Let’s say your Chapter 13 case is required to go 36 months. (Its length is largely based on your income). Let’s also say that beyond paying your regular monthly mortgage you could afford to pay $300 per month towards all of your other debts and obligations. That would only be enough to catch up on the mortgage and property taxes in 36 months. (Some would also go towards trustee and attorney fees).

This would leave no money available for the $53,500 in other debts, including for the divorce debts. That generally means that you would not have to pay anything towards all those other debts. And again, at the end of the Chapter 13 case those debts would all be permanently discharged.

Under other facts you may have to pay something towards these divorce debts and the other unsecured debts. But usually that ends up being only pennies on the dollar. And again, sometimes nothing at all.

So, under Chapter 13 you’d stop your ex-spouse from putting a lien on your home for non-support obligations. You’d be able to catch up on your home payments with payment terms based on your budget.  And after that, after paying only as much as you could afford, if any, towards your non-support divorce debts, you would owe nothing more. Your home would have avoided any liens from those divorce debts. And those debts would be history.

 

Unpaid Child or Spousal Support Never Discharged in Bankruptcy

April 18th, 2016 at 7:00 am

You can’t legally write off child support or spousal support.

 

Our last blog post was about the conditions under which bankruptcy can discharge—write off—all income tax debts that meet certain conditions. Those conditions are mostly met by the passage of time. In contrast, unpaid child and spousal support is simply not discharged through bankruptcy. Not now. Not ever.

Support is Not Discharged, IF It’s Really Support

There IS one possibility, although admittedly this doesn’t often come into play. The Section of the Bankruptcy Code that defines support refers to a debt “in the nature of” child or spousal support. (See Section 101(14A).)

This “in the nature of” language means that an obligation could be called support in a divorce decree or court order, and yet NOT actually be “in the nature of” support. The bankruptcy court is not bound by what your divorce court labeled as support. The bankruptcy court looks beyond the language used in your separation or divorce documents to the kind of debt it actually is under the specific facts of your divorce.

Practically speaking, if an obligation was labeled as support by your divorce court most of the time it will indeed be “in the nature of” support. But not always, so it’s worth looking deeper.

Debts Labeled “Support” That Might Not Be for Bankruptcy Purposes

So what kind of debt is called support but is not really “in the nature” of support? It would be a “property settlement” obligations disguised as spousal or child support.

A property settlement obligation in divorce is one that resolves the division of a marital asset or debt. You may owe your ex-spouse a certain amount of money to make up for receiving more than your share of marital assets. Or you may owe to compensate him or her by taking on a marital debt.

If a divorce decree calls an obligation child or spousal support when it is not really “in the nature of support” but rather is a property settlement obligation, then it may be treated more favorably in your bankruptcy case.

An Example of “Support” that Isn’t “In the Nature of Support”

Imagine a personal loan provided to the two spouses during their marriage by one of the spouse’s parents. In the subsequent divorce, the divorce decree could obligate one of the ex- spouses to repay that loan by paying making payments of “spousal support” until that loan was paid off. In that obligated spouse’s subsequent bankruptcy case, that obligation for so-called “spousal support” would likely be seen by the bankruptcy court as one not “in the nature of” support.

But This Also Cuts in the Other Direction

An obligation that IS “in the nature of” child or spousal support can be called something else in the separation or divorce documents, but could still be treated as a support obligation and not discharged in bankruptcy.

For example, one spouse may be obligated to maintain health insurance on behalf of a child, without the divorce court labeling that obligation as child support. The bankruptcy could determine that is “in the nature of support.”

What Difference Does This Make?

Under Chapter 7 “straight bankruptcy” neither support obligations nor property settlement obligations can be discharged.  But under Chapter 13 “adjustment of debts,” property settlement obligations from a divorce (or separation) CAN be discharged.

So if you have obligations called “support” but which are not “in the nature of support,” a Chapter 13 is worth looking into.

Chapter 13 does not discharge debts after only about 3-4 months of filing the case as happens most of the time under Chapter 7. Instead it happens after a 3 or more years in a court-approved partial payment plan. We’ll explain more about the discharge of debts under Chapter 13 in an upcoming blog post.

 

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