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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.

 

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