“Bankruptcy & Divorce – Part II”

BANKRUPTCY & DIVORCE – PART II

In my prior post, I discussed the ability of a married couple to make a joint bankruptcy filing, as long as they were still married as of the filing date.  I also discussed some of the considerations that should be made in connection with making a possible joint bankruptcy filing and the relief available to Debtors under Chapters 7 or 13, and the benefits and detriments of making a filing under one chapter or the other.  In this article, I discuss the automatic stay that goes into effect immediately upon a bankruptcy filing being made and the impact of the same on a pending divorce, as well as the ability to discharge certain divorce related debts in bankruptcy.

If one spouse files for bankruptcy relief while in the midst of a divorce, an automatic stop or stay of proceedings immediately goes into effect when such bankruptcy filing is made (it is like an injunction).    This stay last until the debtor receives a discharge, which may be 5 or 6 months from the filing date in a Chapter 7 case, or 5  years from the filing date in a Chapter 13, or until such time as the stay is lifted by the Bankruptcy Court.

While the automatic stay prevents creditors from taking action to sue or collect a debt from the debtor (via garnishment for example) or seizing his/her  property (via levy and execution), it does not stop collection action (at least not for very long unless ordered by the Bankruptcy Court) as to the other co-obligor.  The automatic stay will also not affect the ability of the parties to have a Judgment of Divorce entered or halt efforts to determine and/or collect a domestic support obligation, determine paternity, determine child custody or visitation, or prevent entry of an order concerning domestic violence.  In addition it will not stop the entry of orders relating to collecting or withholding monies relating to payment of domestic support obligations, reporting overdue support to the social security administration, enforcing a medical obligation under the Social Security Act, or intercepting a tax refund under the Social Security Act or state law.

The automatic stay will, however, prevent the entry of a divorce property settlement until the discharge is entered or relief from stay granted.  Thus, the filing of a Motion for Relief from Stay may have to be made in the pending bankruptcy case if the non-debtor party desires to conclude the matter and  effectuate a property settlement or have the divorce court determine the same, and the debtor and/or the court appointed Trustee will not stipulate to such relief.  This is because the filing of a bankruptcy petition creates what is known as “property of the estate,” which is composed of essentially all property in which the debtor (the person who files for bankruptcy relief) has an interest.  A Trustee is appointed by the Bankruptcy Court to “administer” property of the estate.  As such, to the extent there is any equity in such property, over and above any proper liens thereon and the amounts the debtor claims as exempt (is allowed to keep), then the Trustee will attempt to realize on such un-exempt equity for the benefit of the debtor’s unsecured creditors.

To prevent the parties in a divorce situation from possibly colluding and letting the non-filing spouse keep everything of value (and giving some of it back to the bankrupt spouse later), and to otherwise make sure the creditors get a fair shake, the Trustee is essentially given a “stake” in the parties’ property.  Thus, he or she may oppose relief from stay or condition it on their approval of any property division that is made by the parties.  In short, there may effectively be 3 parties involved in divorce property settlement negotiations once a bankruptcy filing is made.  If both parties separately file for bankruptcy relief, you may then have another Trustee involved.

While a Bankruptcy Discharge is quite broad, it will not discharge the debtor’s obligation to pay child support or any existing support arrearages.  Property settlement obligations are not dischargeable in a Chapter 7 but such obligations may be discharged in a Chapter 13 bankruptcy proceeding if the debtor completes his court approved repayment plan.  (What may constitute a property settlement obligation versus support has been the subject of many bankruptcy adversary proceedings – effectively lawsuits in the bankruptcy case – and is very much factually driven, despite what the parties may have called it in the Judgment of Divorce).

Bankruptcy proceedings can be quite complicated.  The Chapter under which you file may determine what property you may be able to keep and what property a Trustee may wind up liquidating.  When you add on top of it a divorce filing, you really need legal counsel to guide you through the maze of statutes and proceedings.

If there is any doubt about getting relief from stay, you should take the cautionary approach and move for such relief, as to not do so may violate the automatic stay or the discharge injunction, and subject that party to a claim for monetary damages for such violations.  In order to keep yourself out of “hot water” and receive sound, practical legal advice as to your rights, contact the knowledgeable professionals at Damon, Ver Merris, Boyko & Witte, PLC.  Our attorneys have been practicing in both of these areas for over 60 years, and “know the ropes”. Don’t shoot yourself in the foot by trying to do this yourself.  Call us today.  – Larry A. Ver Merris / October 12, 2017

While this posting originates from a law office, none of the contents should, in any way, be considered legal advice. If you have not signed a retention letter describing the legal services to be provided and the amount to be paid for such services, you are not a client of this firm.