Family Law

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. The division of debt impacts division of property and the award of maintenance and attorney fees.  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

Filing a bankruptcy petition will stay (meaning, stop) 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 divorce 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 by a spouse to get use and possession of 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. 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 Obligations

Filing a paternity action, or establishing or modifying an order for domestic support obligation will not trigger the Automatic Stay. No Motion for Relief from Stay will be necessary. However, the exception to this rule is 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 regarding 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-priority debts.

Orders for child support and spousal maintenance are exempted from discharge.

Allocation of Parental Responsibilities

Like support actions, any case involving the allocation of parental responsibilities is exempted from the Automatic Stay.  As there are no exceptions here, the court can proceed without any involvement from the bankruptcy court.

Domestic Support Obligations

Domestic Support Obligations are immune from bankruptcy.

1. A debt that accrues before, on or after the date of the order for relief in a case under this title.
   

2. Owed to or recoverable by:

   1. a spouse, former spouse, or child of the debtor or such child's parent, legal guardian, or responsible relative; or

   2. a governmental unit.

3. 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.

4. 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:

   1. a separation agreement, divorce decree, or property settlement agreement;

   2. an order of court or record; or

   3. a determination made in accordance with applicable nonbankruptcy law by a governmental entity; and 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 exempt from the Automatic Stay. They are also 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) is 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]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."

Debts to Third Parties

The determination of whether debts owed to third parties (e.g., Citibank, Chase Mortgage, or court ordered attorney's fees), are domestic support obligations is complicated. Although many other jurisdictions have found these types of debts to be dischargeable, the District of Colorado has found them to be 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.