Kentucky Bankruptcy Law

Counsel with Care

Discharge of Debt and Domestic Support Obligations

The changes in the bankruptcy code from the 2005 BACPA essentially eradicated a debtor’s ability to discharge their domestic support obligations. So, if you are divorced or pay child support, it is important to understand what you can do regarding debts arising from the divorce or child support. A recent decision by Judge Scott, Judge for the Eastern Distric of Kentucky Bankruptcy Court, offers a concise explanation of how domestic support obligations arise and how they are impacted by the automatic stay from collection activity of 11 U.S.C. Section 362.

Domestic support obligations (I’ll call these “DSO”s here on out) are defined liberally by the bankruptcy code at 11 U.S.C. Section 101(14A). When a DSO arises because it is “in the nature of” maintenance, alimony or child support, then the automatic stay of Section 362 does not prevent collection actions from property that is NOT part of the estate. The clearest example of this is when the divorce court ordered one party to pay his or her ex-spouse monthly payments (either alimony payments or child support) and the receiving party can still expect to receive those monthly payments from the debtor’s ongoing wages, which are not part of the estate of a Chapter 7. The receiving spouse need do nothing in the bankruptcy court to take action to enforce this order of support.

The recent decision referenced above gives a great example of a very different way that a DSO can arise. In that case, the debtor was ordered to maintain payments on the marital residence until it sold. However, he did not do so (perhaps he could not or maybe he thought he was pulling one over on his ex-wife, I have no idea) and the marital residence foreclosed. There was a deficiency of around $45,500 from the foreclosure as compared to the assessed value of the house. Presumably, the full debt on the house was covered by the sale proceeds and the $45,500 represented equity. So, the debtor had been ordered by the divorce court judge to pay 1/2 of that to his ex-wife. The debtor argued that since the house did sell and there was no net gain from said sale, that he did not owe his ex-wife one cent. Neither the divorce judge nor Judge Scott bought this argument.

The debtor went into bankruptcy with a $22,750 plus DSO as a result of the foreclosure on the marital residence. Since it was not in the nature of alimony, maintenance or child support, the automatic stay did prevent the ex-wife from pursuing collection activity, so she moved the court to lift the stay. She attempted to do so, but failed to sufficiently explain to the bankruptcy court the reason why she should be allowed to have the stay lifted.

The end result is that the debtor clearly has to repay his ex-wife the $22,750 that he theoretically could have realized if he had kept current on payments and sold the house on the open market. However, since the ex-wife did not fully carry her burden of proof, she is going to have to wait until the bankruptcy is closed to take action to collect this debt.

Several lessons come from this case. First, you really should consult with an attorney familiar with both family law and banruptcy law if you are going to allow property that was subject to a decree or court order in a divorce be repossessed or foreclosed upon. The long term cost to you may be far more than you want to incur. Second, remember that bankruptcy does not take care of every sort of debt and you need to recognize what debts will remain. This could help you decide between pursuing a work-out outside of bankruptcy, filing a Chapter 7, or filing a Chapter 13. Third, if you are owed a DSO, be sure to adequately provide evidence to the bankruptcy court of the “good cause” (the reason why you are harmed) required by 11 U.S.C. Section 362(d)(1) for the automatice stay to be lifted.

March 21, 2011 - Posted by | Bankruptcy, Chapter 7, child support, Divorce, Family Law, Foreclosure, Planning, Pre-filing planning, Property (exempt | , , , , , , , , ,

1 Comment »

  1. true… you know what they say…Anything is easier to do if a lot of other people are doing it.

    Comment by Shyam | July 23, 2011 | Reply

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