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.

Child Support Intricacy: Tax credits

The Court of Appeals addresses the treatment of a couple of different tax credits in determining income for child support calculations in the to be published decision Brausch v. Brausch, 2007-CA-002198-ME (Sept. 12, 2008). The appellant, James Brausch, argued that the Earned Income Credit and the additional Child Tax Credit that his ex-wife, Tracy, received in 2006 should count as income for her.

One would have to have all the income figures and plug them into the Kentucky child support worksheet to know how exactly James would benefit from the inclusion of these tax credits. Adding income to either side of the equation can raise the overall support obligation, but also changes the percentage each party would be responsible to pay. So, one can assume that James percentage would be lowered enough to decrease his obligation.

The Kentucky child support definition of income in KRS 403.212 is very broad, but benefits from means-tested public assistance programs are specifically excluded as income. The Court determined that the Earned Income Tax Credit is a public assistance benefit because it is treated as a dollar for dollar payment of tax. Rather than just reducing one’s tax liability, it could actually result in a refund. They also determined it was means-tested because it is directed towards the neediest of families. For example, it is phased out for families with two or more qualifying children at just $11,600.00 earned income. So, the Court held that the Earned Income Credit should not be included as income.

The Child Tax Credit received different treatment by the Court. They point to the $110,000.00 ceiling for receiving this credit so it cannot qualify for exclusion from income as a means-tested public assistance benefit. However, the Court determined that because the Child Tax Credit is determined by and tied to the dependent child exemptions, it is not income. Basically, the Court treated the Child Tax Credit as an extension of the dependent child exemptions which have traditionally been within the discretion of the trial court to allocate between parents. In this particular matter, Tracy had already been awarded the dependent child deductions for the year in question, so she was allowed to keep the $3000.00 she recieved but not include the amount as income.

In going forward in this case and as a guide for others, the Court favors equally dividing such deductions in a simple and straightforward manner. This can be accomplished with an even number of children by assigning each parent one-half of the deductions each year or by rotating the deductions from year to year.

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.

De Facto Custodian and Guardianship

The Court of Appeals of Kentucky recently rendered its opinion in McCary v. Mitchell, 2007-CA-000322-DG (Aug. 1, 2008)(to be published) which clarifies a point of law regarding the status of de facto custodian. A de facto custodian is a person who has provided the primary car of a child and the primary financial support of that child for a certain period of time (6 months for children under 3 years or 1 year if 3 years and older or placed by the Cabinet for Health and Family Services). See KRS 403.270 for a more detailed definition.

In the McCary case, a four year old little girl’s (B.E.M.) mother had been killed by her father, Samuel. Sam was indicted for the 2001 murder, but he did not plead guilty until 2005. During those four years, Sam had guardianship of B.E.M. but the case alludes that she actually resided with paternal aunt and uncle McCary. The maternal aunt and uncle Mitchell had sought custody of B.E.M. early on, but the Graves County District Court had determined it was a guardianship action and left that in the hands of Sam because of the presumption of innocence. The Mitchells resumed their guardianship action once Sam was sentenced.

At first glance, it appears that the de facto custodian provision would apply and give the McCarys equal standing as a parent because B.E.M. had lived with them for the requisite time and, presumably, she had received primary financial support from them. The Court never reaches those factual inquiries because they state that the entire de facto custodian status does not apply in this case. The Court appears to offer two bases for this holding. First, they say that KRS 403.270(1)(b) expressly limits application to dissolution of marriage situations. The second basis is that the de facto custodian provision applies to disputes between a parent or parents and a third party care provider. This makes sense because when a dispute is between two non-parent care providers there is no presumption giving one a superior right. The de facto custodian provision was created to address situations where a non-parent care provider nearly always lost to a parent even if that parent had never been in a caretaker role of the child.

I suspect there would have been an entirely different result had the McCarys sought custody of B.E.M. after caring for her for a year. Had they initiated an action then, they would have been fighting against dad and been on equal footing with dad who was indicted for murder. I also suspect that had they been found to be de facto custodians in that custody action, they would have been in a superior position when the Mitchells pursued their action.

This case highlights some of the vagaries of family law and the need for developing alternate strategies in any particular matter. The various laws that impact family life do not mesh well together leaving open many possible results and surprises.

Grandparents’ rights: custody and visitation

I have come across situations recently where parents were surprised by legal stances the grandparents (their own parents) took regarding their children. In one situation, a young parent went to college to make a better life and was not at a point where he/she embraced the obligations of parenthood. The parent and grandparents agreed that her young child would stay with the grandparents for extended periods of time with the understanding that the child would return to the parent once school was completed. Another situation involved grandparents, who had liberal visits with the grandchild, threatening litigation to ge more visits when the child was grounded for a time.

Common to both situations was the shock by the parents over the standing they discovered the grandparents had to solidify their position in the child’s life legally. This information is not intended to take the side of parents or of grandparents, but simply to educate people about unintended consequences of decisions they make regarding their children and grandchildren.

Kentucky, and many other states now have provisions for establishing a de facto custodian standing by persons, often grandparents, who provide extended care for a child. The exact criteria for Kentucky can be found in KRS 403.270. Basically, if a person other than a parent is the primary care provider and financial supporter of a child for a certain amount of time, courts are to give them equal consideration as the parent in custody determinations. There are more complicated aspects to this law and it interacts with other custody laws, but the basic idea is that if a parent leaves a child in the care of a grandparent (or other person) for six months (children under 3 years of age) or a year (children 3 or older), then that care provider may gain rights to that child that equal that of the parent. It is unlikely that even written agreements to the contrary would alter that standing, and verbal agreements certainly would not prevent this legal standing from coming into being.

Similarly, Kentucky and many states have statutes that appear to grant visitation rights to grandparents. In Kentucky, the statute is KRS 405.021. This law turns out to be weaker than the de facto custody law because of U.S. Constitutional concerns so it is less likely that a grandparent could get a court to force visitation with a grandchild over the reasoned objection of the parents. However, it does open the door to grandparents filing suit in court which can be an expensive and conflict ridden experience.

For parents contemplating using someone, like a grandparent, for extended child care, you should consult with a family law attorney regarding the specifics and the risks involved. For grandparents who are care providers and concerned about losing that status and the wellbeing of your charge, consult a family law attorney with the specifics to see what standing you may have. Although potential legal actions exist, it is best to work out visits between grandchildren and grandparents with reasonableness and the interests of the child in mind.

Voluntary versus Involuntary Termination of Parental Rights

There is an interesting post at Elusive Justice about a practice by the Cabinet for Health and Family Services involving parents who think they are voluntarily terminating their parental rights, but then have an involuntary termination entered against them. This may seem like an immaterial difference, but E.J. walks us through a hypothetical that shows the important ramifications of the practice.