Voluntary Underemployment & Child Support (or Roy’s Very Bad Day)

In a prior post discussing dischargeability of a Dodge Durango Debt from a Divorce, I said that in the case, Howard v Howard, 2008-CA-001059-MR (June 12, 2009)(to be published) the Kentucky Court of Appeals addressed two important domestic support obligation issues. This post reveals that second issue.

As we saw before, Roy lost his argument that the deficiency judgment debt on his Dodge Durango was discharged through bankruptcy. As to his ex-wife Sondra, he remained responsible for the payments because it was agreed to and decreed through the divorce. That made it non-dischargeable as a domestic support obligation and so Sondra could pursue payment through contempt proceedings.

Now, Roy also had left a nice paying job as a federal prison guard claiming a medical reason. Apparently it was not a very good medical reason (or he failed to prove it up) because the trial court determined that his new employment at half his former wages was voluntary. Because it was deemed a voluntary reduction in pay, Roy was ordered to keep paying the same child support as before while earning half the amount of wages as before. He wouldn’t even be able to put gas in the tank of a Durango now.

In order to modify child support, the movant must show “a material change in circumstances that is substantial and continuing.” KRS 403.213. Judges have considerable discretion to decide whether a job change resulting in much less income is voluntary or involuntary. If it is voluntary then that person does not get a break on the child support.

But what if Roy really had a medical problem and could not longer work at the federal prison? Well, if his medical condition was legitimate, and it may have been, then there should have been a trail of documentation that was produced as evidence to the court. If Roy had that evidence, then he needed to pull it together and convince the judge. This is where it actually saves money in the long run to invest in having a good attorney. A good attorney would have either told Roy he was wasting his time because an ingrown toe-nail won’t convice the court, or she would have made sure the evidence was there.

Unfortunately, losing on the Durango Debt and losing on the reduction of child support did not end his very bad day. Roy also had to pay $500.00 towards Sondra’s legal fees. I mean no offense to any of my colleagues that may have represented Roy, and if Roy reads this I am sorry if it seems I am rubbing salt in the wounds, but had he invested in legal counsel knowledgeable in bankruptcy and family law, he could have saved a heap of money in the long run.

Domestic Support Obligation & Bankruptcy (or No Discharge for the Durango Debt)

The Kentucky Court of Appeals just issued a decision directly related to family law and bankruptcy that shows why knowledge of both fields can be so important. In Howard v Howard, 2008-CA-001059-MR (June 12, 2009)(to be published) the Court addressed two important issues regarding domestic support obligations.

A domestic support obligation has a very broad definition under the bankrucpty code (11 USC 101(14A)) encompassing any debt owed to or recoverable by “a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative” including a “government unit”. This includes alimony (maintenance), child support, or other obligations arising out of a divorce or separation. The debt can be established through a separation agreement, decree or other order of the court. 11 USC 523(a)(15). For Kentucky Courts, it also includes a Dodge Durango debt.

In this case, Mr. Roy Shane Howard divorced his wife, but he agreed to, and was later ordered in the decree, to pay towards a deficiency judgment arising from the repossession of their Durango. The case does not say, but that repossession may have been the final straw that broke the back of their marriage. Some folks really love their Durangos.

Anyway, after the divorce, he listed this deficiency judgment as a debt in his bankruptcy and his ex-wife did not object to its discharge so he figured he no longer owed that debt. However, little did he realize that Kentucky Courts share jurisdiction with Federal courts to determine whether an obligation is discharged and the Court of Appeals wasn’t buying the argument that she had to object in the bankruptcy case. After all, the bankruptcy code declares such debts as non-dischargeable and spells out no special action required by the creditor.

This Court determined that Roy’s obligation in the divorce to pay part of the Durango deficiency was a domestic support obligation. While the bankrutpcy discharged the debt as to the original lender, it did not disturb his responsibility for the debt to Sondra, his ex-wife. In other words, the original creditor could not come after Roy for the debt any longer, but they could go after Sondra and Sondra could bring it right back around and get Roy for contempt in the divorce court. And that is exactly what happened.

So, if debts are an issue in a divorce proceeding, it is wise to plan carefully what will happen to those debts. Often, it is best for the each person to set aside the anger and honetly assess if they can pay those debts once the one set of living expenses becomes two separate households. If not, and they otherwise qualify for bankruptcy, then a joint bankruptcy may be the best option.

I said there were two important domestic support obligation issues, but I will save the other one for the next post.

Adoption statutes require strict compliance

Adoption can be an expensive proposition and I have been asked on occasion if a person can do their adoption pro se (on their own and without a lawyer). Actually, this question tends to come up in family law matters in general far more than in other areas of law. I hear this question about self-representation even less often in bankruptcy where folks clearly are in dire straits financially. My response is typically yes, you can but . . .. Then I relate to them a show I saw on Discovery or TLC about a man who was out hiking and became trapped when a boulder rolled onto his arm. He would have died out in this ravine had he not amputated his own arm with a pocket knife (the tv show assured me this was a true story). Anyway, in this graphic and slightly grotesque story the man did what he had to do to survive, but it had to be exceedingly painful and extremely messy. Representing oneself in a family law matter can be just like that: exceedingly painful and extremely messy.

That answer seems to ring intuitively true for people in divorce situations, but many assume that since an adoption is a happy occasion and that judges love putting families together rather than tearing them apart, that one could handle it without a lawyer. The contrary is actually true. In the recent Kentucky Court of Appeals decision R.M. v. R.B., 2008-CA-001099-ME, (2009, to be published), the Court reminds us that “[b]ecause adoption is a statutory right, Kentucky Courts require strict compliance with the statutory procedures to protect the rights of natural parents.” The statutory framework for adoption contained in KRS 199 has many “if, then” kinds of provisions requiring careful navigation even by seasoned adoption attorneys. Because of this strict compliance requirment, adoption is the least likely area of family law where one should proceed pro se. At the very least, consult with an attorney that is knowledgeable in adoptions to see if there are any “boulders” in your particulare situation that need to be dealt with.

Here I am dead and my ex-wife (ex-husband) got all of my retirement!?

It is common for a Separation and Property Settlement Agreement to be reached in a divorce situation where retirement benefits are divided up. When one spouse’s retirement is split up and a portion is given to the other spouse, family law practitioner’s know that a Qualified Domestic Relations Order (“QDRO”) is required in addition to the agreement document. However, due to off-setting of funds, one spouse generally has a retirement account that remains unmolested and sometimes each spouse keep their retirement wholly as their own through negotiations. In this latter situation, a QDRO is not required and so they are rarely prepared and entered with the court and the plan administrator. A recent Supreme Court of the United States (“SCOTUS”) decsion, KENNEDY, executrix of the ESTATE OF KENNEDY, DECEASED v. PLAN ADMINISTRATOR FOR DuPONT SAVINGS AND INVESTMENT PLAN et al., Decided January 26, 2009(available here at Findlaw) points out the danger assuming the divorce’s settlement agreement wraps up loose ends regarding retirement accounts.

In the Estate of Kennedy case, Husband and Wife entered into an agreement where Wife gave up her interest in Husband’s savings and investment plan (“SIP”) that was governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). The divorce was granted and the settlement was accepted by the courts. Husband’s attorney did not see the need for a QDRO and Husband assumed that was that and never changed his designation of beneficiary with the SIP administrator. When Husband died, the SIP administrator disbursed the remaining funds to ex-Wife. Everybody else got a bit peeved over this and sued in Federal District Court because it involved a question of federal law under ERISA.

Without getting too far into the analysis, SCOTUS decided to keep things simple and straightforward for plan administrators: either you do a QDRO or you change your beneficiary. The plan administrator is to look to the documents of the plan under ERISA to determine where the money goes avoiding complicated inquiries into a person’s intent. While a QDRO is an exception to this that could require the administrator to look outside of the plan documents, such an inquiry would be limited.

The lesson here is that if your are able to keep your retirement accounts intact through a divorce, you cannot rely on the divorce settlement agreement to direct those funds upon your death. You must either change your designated beneficiary, or have a QDRO entered – changing your beneficiary is by far the simplest and least costly of those options. Family lawyers need to provide their clients with follow-up directions at the end of a divorce to tie up loose ends such as changing beneficiaries for retirement accounts.

Family Law Planning & Bankruptcy

As I have suggested, I believe there is a significant intersection between family law and bankruptcy law. One example of this link comes in the form of the homestead exemption. Kentucky now allows for debtors seeking bankruptcy to use the Federal exemptions. This greatly increased the homestead exemption from the low and static Kentucky exemption to the Federal exemption that is tied to inflation. Currently, an individual can claim $20,200.00 of the equity of their residence as exempt property. For a married couple, that means they can claim $40,400.00 equity in their residence as exempt. In other words, if you are married, have a home that is valued at $200,000.00 dollars and you owe $160,000.00 on the home that is secured by a mortgage, then you can likely reaffirm the debt of $160,00.00 and still keep your home even in a Chapter 7 bankruptcy.

This knowledge is priceless if you are either contemplating divorce or in the midst of a divorce action. Saving a home in the face of a bankruptcy can benefit your family regardless of whether the divorce occurs or not (though hopefully, as I stated here, the divorce could be avoided). Knowing the exemption and interplay of bankruptcy and family law can allow for wise planning on the timing of the filing or bankruptcy, how marital assets are divided, and where monies might come from to satisfy domestic obligations.

The Debt & Divorce Correlation

Common thought has long been that severe financial stress leads to divorce. Such ideas, when repeated often enough, are accepted as truth without much scrutiny. However, research exists to refute this conclusion (here is one example from 2006 though it focuses on only one culture). I suspect the answer is, as Suzy Brown (Director of Midlife Divorce Recovery Bootcamp) suggests, difficult financial situations bring some couples to renew their efforts to make their marriage work while pushing others over the edge to divorce and I doubt a strong correlation between debt and divorce would be found in the United States population.

What does appear clear is that mounting debt and dire economic expectations leads to increased stress for many folks and finances, in turn become a source of marital strife. For those whom such strife pushes toward divorce, I find it troubling that they would think of dissolving their marriage long before contemplating eradicating their debt. Somehow, in our society, it has become more acceptable to sever the marriage ties, but it remains unthinkable to file for bankruptcy and release the weight of debt. And yet, bankruptcy very well could be the thing that relieves enough stress for those looking to divorce as a solution to back up and give their marriage another chance. Anecdotally, it often appears to be either an issue of pride where they created the debt thus they will be responsible for repaying it come hell or high water. Logically then, those same sentiments of honoring a contract should apply even more to the contract of marriage which is usually ratified before God.

To be clear, I do respect people who desire to be responsible for the debts they created, but there are circumstances when the fresh start that bankruptcy can offer is the best course to pursue. The bankrupcty code, specifically Chapter 7 and Chapter 13, is meant to provide a safety valve for individuals who, by honest mistake or life circumstances, got into debt beyond what they can reasonably manage. In essence, it is legislative grace that not only helps those individuals, but greases the gears of our economy on the larger scale. Our modern day bankruptcy code can be traced to God’s original notions of bankruptcy. That’s right, God designed a bankruptcy code long ago and it can be found in Deuteronomy (begin your review in Chapter 15). In contrast to the year of jubilee and that system of debt relief, Holy Scripture offers only narrow circumstances where divorce is condoned.

So, I urge those folks who are experiencing marital strife due to mounting debt, especially to that subset of people who are considering divorce as a result of this strife, to go talk to someone who knows bankruptcy law and see if you could qualify for relief through a Chapter 7 or 13. If so, that may give you enough surcease from the economic tension to strengthen your marriage. You can find practitioners who are versed in both family law and bankruptcy for an even fuller picture of your options and the consequences of each. I, for one, would far rather represent a couple in a bankruptcy so they can enjoy a real fresh start financially than represent that same couple in a divorce. To that end, I return to posting on this blog and intend to provide information about consumer bankruptcy as well as family law because I see the two areas of law significantly linked.

Hanging out at the intersection of divorce and business

The Supreme Court of Kentucky recently issues it decision in Medical Vision Group, PSC v Philpot, 2008-SC-000017-MR (Aug. 21, 2008)(to be published) which technically creates no case law, but is instructional regardless. The appeal was dismissed because at the time it came before the Supreme Court, the receivership issue was resolved and so the matter was moot.

The short version is that the Judge Philpot, Fayette Family Court Judge, put two companies under receivership because the sole owner of the companies, Dr. Dudee, abandoned the businesses. Dr. Dudee had refused to pay court ordered maintenance and other property distribution from his divorce and so he was jailed for contempt. While in jail, he refused to participate in work release, so his businesses were not generating revenue. Bottom line, Dr. Dudee refused to honor his obligations ordered in the divorce from his wife. Whether he was a conscientious objector or a had just been hijacked by a really bad attitude, I will let the public decide based on the facts in the case should you choose to read it.

The Kentucky Court of Appeals ruled in favor of the trial court by asserting that the judge did the right thing because the two companies were essentially “alter egos” of Dr. Dudee. However, since the trial court judge entered no findings of fact or conclusions of law in his decision regarding “alter ego” doctrine that would allow for the piercing of the corporate veil, the Supreme Court said that could not be the basis of upholding Judge Philpot’s decision. They did opine, though, that Judge Philpot was well within his discretion to enjoin the two companies in the divorce action pursuant to KRS 403.150(6) as proper parties to allow the court to exercise its judicial authority. The Court went on to point out that no third party was harmed by enjoining the businesses because Dr. Dudee was the sole owner. They also elaborated on the obligations that Dr. Dudee was refusing to honor and then added that he initially agreed to the receiver while stating he did not believe the court had jurisdiction to do so (kind of a half-hearted objection meant to move things along, but hoping to preserve an appeal – not terribly effective).

A few lessons emerge. First, if you want to preserve an appeal, be clear on the record rather than ambivalent. Second, if you are the sole owner of a company, it is ineffective to hide or divert assets into that company to keep them out of a divorce situation. Third, other parties can be brought into an action for a dissolution of marriage action, including a company that one of the parties has ownership interest in even if they are not the only owner. Lastly, no one emerges from a divorce unscathed emotionally, spiritually, or financially, but the extent of the injury can be mitigated or worsened by the attitude one adopts in the proceedings.

Paternity Pandemonium III

After reflecting on the recent decision in J.N.R. v. O’Reilly that I posted on here and here, I recognized a troubling conundrum in the law. I will expound with a hypothetical situation beginning where the JNR case leaves off. Absolutely no offense is intended towards the real parties in the real JNR case; this is purely hypothetical:

Where the real case leaves off is with biological father (“BioDad”) unable to get any relief because the trial court has no jurisdiction to proceed. In the hypothetical, the legal father (“LawDad”) has to work two jobs to pay the legal fees that accrued defending against BioDad’s petition and the ensuing appeals. Because of the stress of this, he develops a drinking problem and becomes estranged from his wife. A divorce occurs and biologcial mother (“BioMom”) gets sole custody. BioMom becomes depressed and, as a result of deep depression, neglects the child (“Child”). Child is removed by the Cabinet for Health and Family Services after being found wandering along a busy highway after sneaking out of the house while mom was in a depressed stupor. The Cabinet dutifully seeks out a relative to care for Child, but the only known relative is LawDad whom they find passed out on his front porch after a night of drunken debauchery. Because of LawDad’s double D dysfunction, he cannot have the child placed with him or gain custody.

Now, the stage is set and Child goes into foster care. Because BioDad was denied the opportunity to assert paternity, he has not been judicially found to be a parent. KRS 610.020 requires the Petition to name “parents”, but BioMom and LawDad are still sore about the whole lawsuit thing and never bring BioDad up. Furthermore, KRS 610.040 does not require that he be notified. So, Child is in foster care for the next 15 months because BioMom and LawDad are more focused on sniping at each other than regaining custody of Child.

Next, the Cabinet files a petition for the involuntary termination of parental rights of BioMom and LawDad on behalf of Child. Still, the Cabinet has no idea about BioDad because they never read this blawg and are unfamiliar with this case. Interestingly, KRS 625.060 requires that “biological parents” are made parties to the action, but only “if known”. Here is where the hypothetical has different possible outcomes.

Outcome 1: Parental rights are terminated to BioMom and LawDad and Child spends the rest of his childhood going from foster home to foster home, or perhaps is adopted and lives happily ever after, but always dreams of being with his “real” parents. BioDad sees him years later with the adoptive family and finally learns of all those events, but he can do nothing. In the worst case scenario, adoptive parents are actually sadists bent on mentally torturing Child. Best case scenario is that they are great parents and is relatively unharmed by all these events.

Outcome 2: BioDad finds out and moves to intervene in the termination of parental rights. Now, we are back at the starting point and the court has to determine whether he has standing to intervene under this separate set of statutes. Arguably he would have standing because the statute specifically mentions “biological parents”. This, then, is a huge inconsistency in the paternity laws of kentucky. Regardless, he still has a huge hurdle to overcome because the termination of parental rights statute, KRS 625.090 has no safe harbour provision that would protect BioDad due to his lack of knowledge of the events. In other words, neglect or abuse never has to of been alleged against BioDad. The statute is a list of events, sometimes totally out of the control of the parent, and if one and only one of these events are checked off, then termination can occur. BioDad could be the best dad in the world, but if Child was found to be neglected by clear and convincing evidence, has been in foster care 15 out of the last 22 months (even if it is the Cabinet’s fault for not having enough workers to move the case along), and the judge believes it is in the child’s best interest (purely subjective), then his parental rights could be terminated without him ever getting to exercise them.

Give the above scenario, as unlikely as it is, I have had to reflect on the JNR decision because of the far reaching consequences. I hope that the General Assembly will take up this issue to rectify this legal inconsistency.

Income in divorce is not the same as with the IRS

People typically think of income in terms of how the IRS defines income, even when it comes to divorce. This makes sense because we deal with income and IRS on an annual basis (except certain notable celebrities) while we deal with divorce, if at all, only once (again with certain celebrities excepted). However, they are not defined exactly the same.

In the recently released Kentucky Supreme Court case, Gripshover v. Gripshover, (2005-SC-000729-DG & 2006-SC-000258-DG)(Feb. 21, 2008)(to be published), , one particular difference is illuminated. The IRS provides for certain business expenses to be fully depreciated (expensed) in the year of the expense rather than depreciated over time. 26 USC Sec. 179. The Gripshover Court held that KRS 403.212 provides only for straight line depreciation. This means that the IRS reported income will often be lower than the income used for determining child support in divorce cases where a business owner is one of the spouses.

It also means that the days of relying on a business owner’s 1040 with the various self-employment schedules to show income is gone. CPA’s will be needed who understand the difference definition of income in divorce in order to determine child support.

Fraud or dissipation of assets and divorce

The Kentucky Supreme Court just issued its decision in Gripshover v. Gripshover, (2005-SC-000729-DG & 2006-SC-000258-DG)(Feb. 21, 2008)(to be published). There is a pretty extensive factual background in the published opinion, but unless you either enjoyed reading cases in law school or aspire to enjoy reading cases in law school, I will focus on some key rulings in the case.

Unfortunately, there are spouses who, when they begin contemplating a divorce, engage in fraudulent maneuvering to hide away assets. This can take the form of transferring property belonging to the marital estate so as to exclude it as marital property in the impending divorce. When this dissipation of marital assets occurs, the trial court can recharacterize assets or pull them back into the marital estate in determing a “just” distribution of property.

In Gripshover, the wife alleged that real property transferred into a limited partnership and other property transferred into a trust defrauded her of her marital interest. The Supreme Court disagreed. For a finding of fraud or dissipation, there has to be evidence that the transfers were made in contemplation of divorce and with the intent to impair the other spouses interest. In this case, no such evidence was produced.

While I do not advocate suspicion within a marriage, it is important for both spouses to be understand the ramifications of significant transfers of property. So, I do advocate both spouses being engaged in the finances of the family.