There is a nice little Kentucky Supreme Court opinion called Howard v Howard, 336 S.W.3d 433 (Ky. 2011) every Kentucky family lawyer and consumer bankruptcy lawyer should read. The first part of the opinion addresses child support and contempt sanctions, which to be sure are fun things to know about, but the meat of the opinion spells out the concurrent jurisdiction of Kentucky Courts with the Federal Bankruptcy Courts and how that effects discharge of certain kinds of debt.
Under 28 U.S.C. Sect. 1334(b), a state court has the same and concurrent jurisdiction as a bankruptcy court to make a determination as to whether a particular debt is discharged by a bankruptcy. In the Howard case, the ex-husband had agreed to be responsible for certain debts the ex-wife had also co-signed. However, he went into a Chapter 7 and received a discharge of that debt. Even though the ex-wife had notice of the bankruptcy and did NOT file any objection in the Chapter 7, she was still able to go to the Kentucky Circuit Court where the divorce had occurred and get a ruling that ex-husband still owed the obligation to her.
You see, the divorce decree created an obligation between the ex-husband and ex-wife even though a third party was the direct creditor. This obligation was found to be an 11 U.S.C. Sect. 523(a)(15) obligation as a result of a divorce. Therefore, by operation of that law, that obligation to the ex-wife was not touched by the bankruptcy. When the original creditor came back to collect from the ex-wife, she was able to pursue contempt against the ex-husband and win. This saved ex-wife from having to pay for a lawyer in the bankruptcy in addition to paying for a lawyer in the Circuit Court case.
I am glad to announce that Matthew D. Henderson will be joining Troutman & Napier, PLLC as an associate attorney. Matthew comes to us from the Fayette County Attorney’s office. Prior to that, he served as Judge Philpot’s judicial intern in Fayette Family Court. He will be bringing tremendous skills and knowledge in areas of criminal law and family law as well as estate planning and general litigation. With the addition of Matthew, Troutman & Napier, PLLC offers a full range of services and practice areas for our clients.
This post can be found on my family law website here. It addresses issues connected to post-divorce debt and distribution of assets and is a must read.
There are two different sorts of domestic support obligations defined in the bankruptcy code. The first kind of domestic support obligation encompasses things such as child support payments and alimony (called maintenance in Kentucky). The second sort comes from an equitable distribution of property subsequent to a divorce. The term “domestic support obligation” first appears in 11 USC Sect. 101(14A), but these two different kinds of domestic support obligations only become apparent when one looks at how they are treated in terms of discharge of debt.
At first glance at 11 USC 523(a)(5) & (15) it looks like these two types of domestic support obligations are treated the same. That is to say, neither child support and alimony type obligations nor equitable distribution of property appear to be discharged in bankruptcy. This is true when it comes to Chapter 7 liquidation type bankruptcy. However, it is a different story in Chapter 13, but one has to look at the bankruptcy code carefully to discern this difference.
So, now we have to turn to 11 USC Sect 1328(a)(2) to see the rest of the story. This oddly written statute basically says that all debts except for certain ones get discharged once all the plan payments are made. The specific provision mentioned includes 11 USC Sect 523(a)(5) as an exception that does NOT get discharged. However, that provision conspicuously leaves our 11 USC Sect. 523(a)(15). This latter provision, 523(a)(15) pertains to equitable distribution of assets subsequent to a divorce.
Bottom line: if you agree to let your soon to be ex-spouse pay you later for your share of equity in the marital residence, then you may end up losing out if he or she ends up in a Chapter 13. That chunk of equity may well end up being treated as a general unsecured debt receiving only pennies on the dollar. However, child support and alimony (maintenance) will not be discharged in a Chapter 7 or a Chapter 13.
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.
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.
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.
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.
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