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.
Bifurcation sounds like a painful surgical procedure, but it merely means splitting a joint bankruptcy into two separate ones. Marriage takes tremendous effort (I should know – I have been married to the same woman for 23 plus years) and when a couple is also stretched and stressed by financial tribulations, the marital relationship can take hit after hit. Often, bankruptcy can provide the relief needed on the financial front that allows the husband and wife to redirect their emotional resources to restoring the marriage.
I have encountered a few couples, though, where the relief of bankruptcy was insufficient for them to turn back towards each other. I am sad for these times when one or both decide that they have gone too far and divorce must happen. When this happens after a joint Chapter 7 has been filed, then there is no impact on the bankruptcy. However, in a Chapter 13 the couple will probably opt to split the case. At the point of divorce, the parties financial interest and desire for maximum separation makes the case split, or bifurcation, necessary. After all, who wants to keep pooling resources with an ex-spouse.
The process to bifurcate is simple enough. An entirely new filing fee is assessed by the court for the new case. A motion to split the cases must be filed and served on all creditors and the trustee in the case. Typically, the motion provides for a 14 day notice and opportunity to object to the case split, but each district is likely to have variations on this. After that period has run and the fee paid, then clerks create two identical cases.
Once the split occurs, though, each party must file new Schedules I & J showing their individual budgets. They also must create separate payment plans, modifying the confirmed plan or amending a pending plan. If there is real estate, at least one party is likely surrendering the house in their plan. If either party could have filed a Chapter 7 to begin with or their new income would qualify them for a Chapter 7, then that party may opt to convert to a Chapter 7.
I was sitting in state court just the other day and saw yet another example of the interplay between divorce and bankruptcy. A creditor had sued a woman for a delinquent debt. The woman came to court to defend against a motion for default judgment. Her defense was that she was not responsible for the debt because it had been assigned to her ex-husband in their divorce.
Unfortunately, that is not a valid legal defense. Many divorced persons erroneously assume that the divorce decree assigning debt to their ex also absolves them of liability on that debt. It does not. This woman is now facing wage and bank account garnishments because her ex-husband failed to pay the debt. He may have even filed bankruptcy which would explain why the creditor was only coming after the woman. Her only option is to go back to family court and get that judge to enforce the divorce order using contempt powers and make the ex re-pay her for what it cost her. If he only filed a Chapter 7, his obligation to her remains. If a Chapter 13, it would likely be treated as an unsecured debt that can be discharged since it is not the same as child support or alimony.
Regardless, if he is without resources, this may mean he spends some time in jail for contempt, but the woman’s finances are still wrecked and she may also have to file bankruptcy to get relief. Ah, divorce – the curse that keeps on cursing – the devil’s own little specialty area. Anyway, it is important for family law practitioners to know something about bankruptcy and bankruptcy lawyers to know something about family law so that their clients are not caught unaware.
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 bankruptcy 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-discharged 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 bankruptcy 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 honestly analyze 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. suffice it to say that this sort of deficiency debt could have been discharged in a Chapter 13 instead of the Chapter 7 he filed.
As I have suggested in other posts, 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 of $5,000.00 to the Federal exemption that is tied to inflation. Currently, an individual can claim over $21,625.00 of the equity of their residence as exempt property. For a married couple, that means they can claim over $43,250.00 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 reaffirm the debt of $160,00.00 and still keep your home 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 in my last post, 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.
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 circumstances lead to increased stress for many folks. Finances then 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 while 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. 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 a covenant ratified before God.
To be clear, I do respect people who desire to be responsible for the debts they created. However 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 including over mounting debt 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 relief from the economic tension to focus on strengthening 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.
I was just talking the other day to a client who had a real estate transaction question. The context of the real estate transaction included a co-signed debt, a family law issue, and a high risk of bankruptcy for the co-debtor. If I only understood one of those areas of law or only knew a part of the context of his question, then I would have given the wrong advice.
If I had only thought about the transfer from the family law perspective, I would have advised against the transfer. If I have only contemplate real estate law and looked at the value of the property versus the debt load, I probably also would have advised against the transfer. However, knowing the impact of the imminent filing of bankruptcy by the co-signer and how that would interplay with the family law issue and the ability to enact a transfer post-bankruptcy, made the exact opposite answer the better advice to give him.
Bankruptcy law permeates every single other area of law that involves financial transactions of any sort. This is because the bankruptcy code preempt debtor and creditor rights and obligations of state law to a huge extent. So, whether you are contemplating a divorce settlement, a real estate transfer, a debt settlement, or a multi-million dollar contract, ask your lawyer what would happen if you or the other party ended up in bankruptcy. If they have no idea, ask them to research it or consult with a bankruptcy practitioner.
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.
Alimony, or maintenance as it is called here in Kentucky, is an interesting topic because how state law defines and treats alimony does not necessary mesh with the bankruptcy code. In this post, I am talking about when a non-debtor ex-spouse owes the person filing bankruptcy (the debtor) alimony or maintenance (the two terms are interchangeable and I’ll stick with alimony since it is the most recognized). The scenario is a divorced debtor filing a bankruptcy (it can be either a chapter 7 or a chapter 13) because their ex has failed to pay the alimony as ordered as is now in a world of hurt. So, the debtor has to list the alimony owed to him or her because it comes into the bankruptcy estate through 11 USC Sect. 541. There is even a “clawback” provision in 11 USC 541(a)(5)(C) that reaches 180 days beyond the filing date of the petition in cases where a divorce has not yet been finalized.
To be sure, 11 USC Sect. 522(d)(10)(D) appears to exempt alimony (“the right to receive”) so that the debtor gets to hold on to it. However, appearances can be deceiving because the bankruptcy courts do not have to accept the determination of the parties or the state court in deciding if a certain asset is alimony. The debtor may have a court order that calls what the ex owes them alimony and he or she may believe it is alimony, but the bankruptcy court can decide differently. If the bankruptcy court deems the awarded monies to actually be a property settlement, then it is not exempt beyond any available “wild card” exemption from 11 USC 522(d)(5).
The bankruptcy court makes its determination as to whether or not an award of alimony is truly alimony or if it is actually a property settlement mechanism by looking at what actually transpired. There are different aspects that the court may focus on and so it is more likely to be alimony if: 1) it ends at death or remarriage, 2) it can be modified based on need, 3) the debtor did not have property or resources to meet their basic needs, 4) it is subject to the tax treatment for alimony in the tax code (taxable to recipient; deductible by payor), and 5) the payments go directly to the debtor. If, on the other hand, the award of monies was in lieu of other property or debt, then it may not be deemed alimony. These are not necessarily exclusive factors, but they give an idea of how the courts analyze an alimony claim of exemption. The bottom line is that the court wants to be sure that the monies are actually for the support and sustenance of the recipient. This is consistent with the other items in Sect. 522(d)(10)(D) because each is a replacement for wages.
Be careful entering into a bankruptcy if you are the recipient of alimony or maintenance. When you interview your prospective attorney, but sure they understand the nuance behind the stated words of the law. They need to be able to analyze how likely the court is to see the award as alimony. If the award is sizable, then you can expect to have an objection to the exemption be filed by the trustee. If you win by convincing the court that it is indeed alimony, you will still have to show that all of it is “reasonably necessary” to live on – and that does not mean living in style or luxury.
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