When Marriages and Relationships Go Bankrupt
Money and assets are essential parts of divorce and support cases. Although the parties involved in family law cases have interests in money and assets, the reality is that creditors also often have interests in that same money or assets. Sometimes the pressure of creditors interested in obtaining that money or assets becomes so great that filing for bankruptcy is a viable and often resorted-to option by debtors. Of course, filing for bankruptcy potentially can directly conflict with the purpose of division of assets in divorce or support cases.
Generally speaking, filing for bankruptcy will result in an automatic stay against any potential creditors; however it does not serve as a stay upon any proceeding ­regarding the establishment or modification of an order for domestic support obligations and/or the dissolution of a marriage (with the exception of when a determination is sought regarding the division of property that is property of the marital estate).
In terms of the discharge of debts, 11 U.S.C. Section 523(a) prohibits the discharge of debts for support or pursuant to a divorce order. It also prohibits the discharge of debts to a current or former spouse and debts to a child generated during divorce litigation. In short, any debt that arises from a family law matter generally cannot be discharged in bankruptcy. Indeed, if ­filing pursuant to a Chapter 13 bankruptcy, the debtor must propose a plan that pays his domestic support obligations in full. For the purposes of Chapter 13, domestic support obligations include debts owed to one’s ­current and former spouses, child, child’s other parent, and support and alimony. It is worth noting that the language a family court uses in its orders is irrelevant to a bankruptcy court. In other words, bankruptcy courts apply bankruptcy law without regard to whether a family court attempts to work around bankruptcy issues through the use of ­different terms or carefully ­constructed language.
Sometimes an order in a family case can qualify as a nondischargeable support obligation even if it is not a “support case” (e.g., a child support case or a spousal support case). The court has laid out at least four factors to consider that can help discern whether such an order is a support obligation. First, one must look to the ­actual language of the obligation to discern whether it is couched in a way that makes it clear that it is support. Second, one must analyze the respective financial situation of the parties. For example, a great post-divorce wealth disparity between the parties would suggest the obligation is support rather than ­something else. Third, one must try and discern the purpose of the obligation at the time it is entered. Is it clear that its purpose is support, or is it merely property division or for some other reason? Fourth, and related to the previous factor, one must analyze any ­available evidence suggesting the intent of the estranged spouses. Did they intend for the obligation to be support?
In making its decision as to whether an obligation is, in fact, support, courts look at, and balance, all relevant evidence, which includes: the parties’ employment histories; the parties’ prospect for future income; in what proportion the marital property was divided; the number and frequency of any payments from one party to another; the need of the person in receipt of the alleged support for the same; the length of the marriage; the economic disparity between the parties; whether a party is caring for minor children; how the court labeled the money or payments (e.g., did it call it “support”?); and, when the ­alleged support ends or terminates.
Under bankruptcy law, and how it relates to family law, support obligations are distinguished from property settlement agreement debts as to whether they are dischargeable. Marital debts addressed in a property settlement agreement for a divorce may be discharged, and are not priority claims for the purposes of Chapter 13 cases. However, for the purposes of Chapter 7, the presence of a hold harmless clause in a property settlement agreement for such a debt between the ex-spouses creates a new debt between them that cannot be ­discharged. The same applies to debts owed to third parties.
In many family law cases, the court will award one litigant attorney fees for the litigation of the underlying family case. An award of attorney fees is considered to be a type of support and, therefore, cannot be discharged. In saying that, there have been cases where attorney fees have been awarded to a party in a family law case as a result of a sanction or as compensation for bad faith on the party of the adverse party. As these attorney fees are punitive in nature, they do not qualify as support and may be discharged.
The above hopefully provides a ­general guideline as to how family law and ­bankruptcy law relate to one another. It is always recommended for a family lawyer to consult with a bankruptcy lawyer when considering these issues.
Aside from the statute cited above, the following are recommended to review: 11 U.S.C. Section 522, 11 U.S.C. Section 362, In re Shepard, No. 07-1177 S 2008 Lexis 3349 (Bankr. S.D. N.Mex. June 30 2008); Nelson, Keys & Keys v. Hudson, No. 06-81745, 2007 Bankr. Lexis 3943 (Bankr. C.D.Ill. Nov.27, 2007); Deichert v. Deichert, 402 Pa.Super. 415 (1991), Long v. Calhoun, 715 F.2d 1103 (6th Cir.1982); Schulze v. Schulze, 15 B.R. 106 (1981). •
Originally published in The Legal Intelligencer on on June 27, 2016 and can be seen here.