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Divorce and Bankruptcy
If you or your spouse is likely to file for bankruptcy around the time of
the divorce, the two of you should file together before or during the
divorce.
A large part of the divorce process is dividing property and debt. One of
the factors a court will use in dividing property, awarding maintenance and
awarding attorney fees is how debt is divided. However, every situation is
different and you must know your options to determine if filing bankruptcy
is the best for you. No matter what your decision, you should know how the
bankruptcy impacts the divorce proceeding.
The Automatic Stay
The filing of a bankruptcy action by a consumer debtor will stay certain
proceedings, including collection actions such as garnishments and
foreclosures. How the automatic stay impacts a domestic relations case
depends on what is at issue in the case.
Property – The Automatic Stay will apply to property in a dissolution
of marriage action. Specifically, the bankruptcy petition operates as a stay
of any act to obtain possession of property of the debtor’s bankruptcy
estate, any attempt to exercise control over property of the estate, and/or
any act to collect a claim against the property of the debtor’s estate.
Thus, any attempt of a spouse to get use and possession or an equitable
division of assets of the debtor spouse is a violation of the Automatic
Stay. Violations of the Automatic Stay can result in damages against the
non-debtor spouse, so to avoid the complications that are associated with a
violation of the automatic stay, the other spouse should file a Motion for
Relief from Stay in order to proceed with any issues related to property.
Support – Unlike domestic cases involving property, the commencement
or continuation of an action to establish paternity, or to establish or
modify an order for domestic support obligations are exempted from the
Automatic Stay. This means the District Court can continue to proceed with
the action without the filing of a Motion for Relief from Stay. Although the
general rule is that all actions related to support are exempted for the
Automatic Stay, the exception to this rule exists when you are trying to
collect a domestic support obligation from non-exempt property of the
bankruptcy estate. For example, trying to garnish a bank account or put a
lien on the residence of the debtor may still be a violation of the
Automatic stay. In these instances, a Motion for Relief from Stay would need
to be filed and it is always better to be safe than sorry when there is a
question if it is non-exempt property. However, such an action may not be
necessary or cost effective, as a domestic support obligation is considered
a priority and will be paid first, before other non-property debts.
Allocation of Parental Responsibilities – Like support actions, any case
involving the allocation of parental responsibilities is exempted for the
Automatic Stay. As there are no exceptions here, the court can proceed
without any involvement from the bankruptcy court.
Domestic Support Obligations – Pursuant to 11 U.S.C. 101(14A), a
“domestic support obligation” is:
a debt that accrues before, on or after the date of the order for relief in
a case under this title –
(A) owed to or recoverable by –
(i) a spouse, former
spouse, or child of the debtor or such child’s parent, legal guardian, or
responsible relative; or
(ii) a governmental unit;
(B) in the nature of alimony, maintenance, or support
(including assistance provided by a governmental unit) of such spouse,
former spouse, or
child of the debtor or such child’s parent, without regard to whether such
debt is expressly so designated;
(C) established or subject to establishment before, on,
or after the date of the order for relief in a case under this title, by
reason
of applicable
provisions of –
(i) a separation
agreement, divorce decree, or property settlement agreement;
(ii) an order of court of
record; or
(iii) a determination
made in accordance with applicable nonbankruptcy law by a governmental
entity; and
(iv) not assigned to a
governmental entity, unless that obligation is assigned voluntarily by the
spouse, former spouse, child of
the debtor, or such child’s parent, legal guardian, or responsible relative
for the purpose of collecting the debt.
Domestic support obligations are not just exempt from the Automatic Stay,
but they are exempted from any discharge granted to a debtor. There is no
requirement for the obligee to file a claim in the bankruptcy court. In
fact, as a debtor’s discharge of domestic support obligations under 11 U.S.C.
523(a)(5) are automatically excluded, it is necessary for the debtor to file
a complaint for determination of discharge.
This determination of whether a debt is a domestic support obligation, and
thus non-dischargeable, can be heard in either the district court or the
bankruptcy court, as “[t]he bankruptcy court has concurrent, rather than
exclusive, jurisdiction with a state domestic relations court to determine
whether a debt is in the nature of support and is therefore excepted from
discharge under 11 U.S.C. 523(a)(5).” In addition, “[t]here is no time limit
for filing of a complaint to determine the dischargeability of a support
debt under 11 U.S.C. 523(a)(5), and such contests may be brought before or
after a discharge has been granted by the bankruptcy court.”
Support – It is quite clear from the definition that orders for child
support and spousal maintenance, which are payable to a former spouse, are
exempted from discharge.
Debts to Third Parties – The determination of whether debts owed to
third parties, i.e. Citibank, Chase Mortgage, or court ordered attorney’s
fees, are domestic support obligations is more complicated and the source of
significantly more dispute. Although many other jurisdictions have found
these types of debts to dischargeable, the District of Colorado has found
them to domestic support obligations and treated much like support.
Consequently, it currently appears that under the amended Bankruptcy Code,
virtually all property settlement and other divorce related debts should be
exempted from discharge in Colorado. Of equal importance, divorce related
debts would be automatically exempted, which means it is no longer necessary
to file a claim in order to have a determination of dischargeability. Now,
these types of debts are treated just like spousal maintenance and child
support, requiring the debtor to file a claim for any determination that
said debts should be discharged.
For more information about Bankruptcy please
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