Kentucky Bankruptcy Law

Counsel with Care

Domestic Support Obligation and 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 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.

March 22, 2013 Posted by | Bankruptcy, Divorce, Family Law, Marital Assets | , , , , , , , | 4 Comments

Violation of the Discharge Order: What you get

I post last Friday about how to pursue a violation of the discharge order from a bankruptcy. Once contempt has been proven to the court, the question turns to sanctions. This normally involves an award of monetary damages to the Debtor to be paid by the creditor. While it seems that this part is the simple, no-brainer part, it is actually where the most care should be taken.

We need to go back to prior to re-opening the bankruptcy case to be sure to cover this topic adequately. The court is going to look to see if the Debtors’ attorney went straight to litigation as opposed to attempting to mitigate damages. My practice on this may go overboard on mitigation, but I believe the principal is sound. I always provide my clients with a copy of the discharge order and instruct them: 1) if a creditor violates the order, send them a letter and attach a copy of the order making sure to keep a copy of the letter sent, and 2) if the creditor persists, they should contact me. Once they contact me, I will again communicate the order to the creditor with a “cease and desist” letter.

If the violation involved something more than directly contacting the Debtor, though, I may alter step two. For example, if the creditor has contacted neighbors or co-workers of the Debtor to attempt to collect the debt, then the cease and desist letter would also demand monetary compensation for the Debtor. If the creditor persists, then litigation is warranted.

Now, one reason to take the approach I outlined is that the scope of damages ranges from only actual damages all the way to punitive damages. If the violation is one where a mistake was made by the creditor and then timely rectified, the court is unlikely to award punitive damages. Furthermore, if they see no signs of mitigation attempts, the court may not even award all of the attorney fees. However, if the violation is egregious then the court may impose far larger monetary awards to the Debtor. So, my approach prevents needlessly mounting attorney fees while still getting the Debtors relief.

November 19, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Debt collection, Discharge, Violation | , , , , , , , , , , , , | Leave a comment

Violation of the Discharge Order: What to do

When a bankruptcy results in a discharge of debt, whether it be a Chapter 7, 12, 13 or otherwise, creditors are precluded from taking action to collect on that debt down the road. In Kentucky and many other jurisdictions, there is no private right of action (no right to file a separate lawsuit) for the violation of a discharge order, so the matter has to be taken up as a contempt action within the bankruptcy. The first step is for the bankruptcy to be re-opened. Once reopened, the Debtor can file their motion to impose contempt sanctions against the creditor.

The bankruptcy court must make a determination if contempt of the order occurred and the first step in that is finding that the actions of the creditor were “willful”.  A willful action, in this context, does not mean that the creditor deliberately decided to go against the court’s order. Rather, willful means that the creditor intended to do the thing that was the violation even if they did not intend the result. So, if the creditor files a lawsuit seeking to collect on the discharged debt personally from the Debtor, this is intentional; they did not accidentally file a lawsuit. They intended to file the lawsuit and intended to name the debtor personally even if they did so without any awareness that they were violating the order. In other words, the “Oops, my bad” defense would not suffice.

Along with this willful element, there must be evidence that the creditor actually knew about the discharge order. This comes down to showing that the creditor was served with notice of the discharge occurring. Just because they failed to communicate this knowledge to their attorney would not get them off of the hook. However, this has to be shown by a heightened standard of “clear and convincing” evidence. So, evidence that the Debtor verbally told the creditor that the debt was discharged is likely not good enough. One would want a paper trail on this element.

If the action that was a violation was intended and the creditor had actual knowledge of the discharge then the court can find that contempt occurred. Once a finding of contempt is made, the court then decides what sanctions are to be imposed.  Sanctions typically involve awarding monetary damages. Monetary damages can include attorney fees, but check back for my next post on this issue.

November 16, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Civil Procedure, Discharge, Violation | , , , , , , , , , | 1 Comment