Kentucky Bankruptcy Law

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Divorce, debt and the Devil’s heyday

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.

April 19, 2013 Posted by | Bankruptcy, Debt collection, Divorce, Family Law, Garnish | , , , , , , , , , | 2 Comments

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

The Debt / Divorce Correlation

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.

February 22, 2013 Posted by | Bankruptcy, Divorce, Family Law | , , , , , , | 4 Comments