Bankruptcy and Divorce: What Divorce Counsel Should Know About Bankruptcy - October 2008
| Publication year | 2008 |
| Pages | 35 |
| Citation | Vol. 37 No. 10 Pg. 35 |
2008, October, Pg. 35. Bankruptcy and Divorce: What Divorce Counsel Should Know About Bankruptcy - October 2008
October 2008
Vol. 37, No. 10 [Page 35]
About the Authors
David C. Hoskins and Ellen R. Welner practice bankruptcy law with the firm of George T. Carlson & Associates in Englewood-(303) 789-1313, dchoskins@cobk.com, erwelner@aol.com.
With the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, some of the bankruptcy rules and procedures have changed. This article discusses the interplay of divorce and bankruptcy, including the importance of timing, the respective jurisdictional limits, the discharge of debt, and the application of the automatic stay.
Financial difficulties are commonplace in divorce.(fn1) It is not unusual for the financial stresses of divorce to lead to bankruptcy for one or both parties, or for insolvency and the need for bankruptcy relief to be the precursor to divorce. Bankruptcy attorneys must be able to identify and advise clients about issues arising out of separation and divorce that could affect a bankruptcy case. Family lawyers also should be aware of the issues common to both proceedings.
Colorado district courts have jurisdiction to enter decrees of divorce and legal separation, as well as determinations of child and spousal support, division of property and debt, and allocation of the costs of litigation between the parties.(fn2) U.S. bankruptcy courts have jurisdiction to administer bankruptcy estates, including the turnover of property to the estate, avoidance of fraudulent transactions, recovery of preferential payments, establishment and enforcement of the automatic stay, and determination of dischargeability of debts.(fn3) In certain circumstances, the jurisdictions of the state district court and the bankruptcy court may be concurrent.(fn4) In other instances, however, the bankruptcy court may have jurisdiction to supersede a decision of the state court.(fn5)
On April 20, 2005, President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (2005 Act or BAPCPA).(fn6) The 2005 Act made many changes to bankruptcy law, one of the most significant affecting dischargeability of debts and the way family court practitioners should approach property settlements.
This article discusses the interaction between bankruptcy(fn7) and Colorado divorce law, highlighting issues pertaining to dischargeability of debts, marital assets that may be assets of the bankruptcy estate, and application of the automatic stay to family court matters. The discussion also suggests strategies for timing bankruptcy and divorce actions and drafting settlement documents.
Dischargeability
With the addition of the term "domestic support obligation" and the removal of the balancing test of 11 U.S.C. § 523(a)(15), the 2005 Act significantly changed the law relating to dischargeability of marital obligations. These changes are discussed below.
Chapter 7 and Chapter 13, Pre-BAPCPA
Discharge of debt generally is the ultimate goal of bankruptcy. Prior to the 2005 Act, all debt was discharged by a Chapter 7 bankruptcy, with notable exceptions. These exceptions included debts:
* for taxes(fn8)
* incurred through fraud(fn9)
* incurred but not listed in the schedules(fn10)
* incurred through fraud or defalcation while acting as a fiduciary(fn11)
* for child or spousal support, including debt in the nature of child or spousal support(fn12)
* incurred in the course of a divorce or separation or in connection with a separation agreement, divorce decree, or other order of court, unless the debtor did not have the ability to pay or unless discharging the debt would have resulted in a benefit to the debtor that outweighed the detrimental consequences to a spouse, former spouse, or child.(fn13)
Thus, under the former Bankruptcy Code, child support, spousal support, and debts "in the nature of support" were excepted from discharge.(fn14) Some courts found debts to attorneys representing the former spouse(fn15) and debts to guardians ad litem for the child(fn16) to be debts "in the nature of support" and not dischargeable.
The "super discharge" of Chapter 13 included many debts not discharged in a Chapter 7 bankruptcy, such as debt incurred through fraud; debt not listed in the schedules; debt for willful and malicious injuries; and certain damages, fines, and penalties.(fn17) A Chapter 13 discharge also relieved debt incurred in the course of a divorce or separation or in connection with a separation agreement, divorce decree, or other order of court (except for child or spousal support).(fn18)
Chapter 7 and Chapter 13, Post-BAPCPA
Under the 2005 Act, debtors who file a Chapter 7 petition still receive a discharge of debts, much like a discharge under the pre-BAPCPA Bankruptcy Code.(fn19) Significant for family law practitioners are the changes to 11 U.S.C. § 523(a)(5) and (15), which are discussed below.
Domestic support obligations. Under § 523(a)(5), instead of excepting from discharge child or spousal support, including debts in the nature of child or spousal support,(fn20) Congress created and precisely defined a category of debt called "domestic support obligations," which still are excluded from discharge. The 2005 Act excepts from discharge obligations that are owed to a spouse or former spouse; child or such child's parent, legal guardian, or responsible relative; or a governmental unit, that are in the nature of alimony, maintenance, or support of such spouse, former spouse, or child.(fn21)
The new law includes in the definition of "domestic support obligation" an element requiring that it be "owed and recoverable by a spouse, former spouse, or child of the debtor or such child's parent, legal guardian or responsible relative; or a governmental unit."(fn22) Also, to be excepted from discharge, the obligation must be "in the nature of alimony, maintenance or support."(fn23)
Cases interpreting the new definition have focused on these two elements. Concerning the issue of to whom the obligation is owed, one domestic court's final orders of divorce required the debtor to pay the ex-spouse's attorney fees directly to the lawyer; the order was not enforceable in the name of the ex-spouse. Because the obligation was not "owed to or recoverable by" the ex-spouse, it was not a domestic support obligation and therefore was dischargeable.(fn24)
In another case, the obligation to pay the ex-spouse's attorney fees was found to be owing to and enforceable by the debtor's ex-spouse and in the nature of support. The court ruled the debt to be nondischargeable.(fn25)
In an adversary complaint to determine dischargeability of debts allocated to the debtor, brought by the personal representatives of the estate of her ex-spouse, a bankruptcy court found the plaintiffs, who were not a spouse, former spouse, or child of the debtor, lacked standing.(fn26)
Determining whether the element of the obligation is in the nature of support is a matter of federal law(fn27) and a question of fact for the bankruptcy court.(fn28) Neither state law nor the divorce court's characterization of an award as property settlement binds the bankruptcy court.(fn29)
One bankruptcy court has outlined the following factors to be assessed in determining whether an obligation is in the nature of support:
1) the substance and language of the document in question;
2) the financial condition of the parties at the time of the decree or agreement;
3) the function served by the obligation and intent of the parties; and
4) whether there is evidence to question the intent of a spouse or evidence of overbearing by either party.(fn30)
In Boyle v. Donovan,(fn31) although state law did not require parents to pay for a child's college education, the agreement that debtor would provide this means of economic benefit to the child substantiated the trial court's finding of an obligation in the...
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