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Domestic Support Obligations: child support, alimony, and equitable distributions

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.

July 16, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, child support, Divorce, Family Law, Marital Assets, Pre-filing planning | , , , , , , , , , | 1 Comment

Domestic Support Obligations: child support, alimony, and equitable distributions

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 you soon to be ex-spouse pay you later for your share of equity in the marital residence, then you may end up loosing 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.

February 1, 2012 Posted by | Uncategorized | , , , , , , , , , | 8 Comments

The case of mismatched law: alimony and bankruptcy

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.

June 30, 2011 Posted by | Bankruptcy, Chapter 13, Chapter 7, Divorce, Exemptions, Family Law, Planning, Pre-filing planning, Property (exempt | , , , , , , , , , | Leave a comment

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

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.

September 3, 2008 Posted by | Civil Procedure, Divorce, Family Law, property allocation | , , , , , , , | 1 Comment