How Did This Case End Up in BANKRUPTCY Court?

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1 How Did This Case End Up in BANKRUPTCY Court? Presented by Betsy Lynch CREDENTIALS Westminster College, B.A. in Business & Finance, 2002 UMKC Law School, J.D., 2005 Law Clerk to Hon. Robert L. Trout, 2006 Practiced exclusively bankruptcy law since 2007 Owner of Lynch, Sharp & Associates, LLC; see BANKRUPTCY CLE FOR FAMILY LAW PRACTITIONERS Dischargeability of family law attorney s fees in bankruptcy Appropriateness of filing Motions for Relief from Stay Refinancing homes pursuant to Divorce Decrees Y--1 1

2 What is dischargeable? 28 USC 1328(a) Examples: Credit card debt Medical bills Repossessions and foreclosures Signature loans DISCHARGE DISCHARGE What is not dischargeable? 11 USC 523(a) Examples: Priority tax debts Student loans Domestic Support Obligations As it relates to Family Law Attorney s Fees 523(a)(5) exceptions to discharge for Domestic Support Obligations Attorney s fees are not secured debts priority debts child support maintenance But they are awarded in the divorce decree, so... Are they considered a domestic support obligation? Y--2 2

3 What is a DSO? 11 USC 101(14A) defines DSO A debt that accrues... In the nature of alimony, maintenance, or support of such spouse, former spouse, or child of the debtor or such child s parent DSOs are priority claims under 11 USC 507(a)(1)(A) In re: Phegley (Phegley vs. Phegley) 443 B.R. 154 (B.A.P. 8th Cir. 2011) Factual Background Income of Debtor Income of Non Debtor Date of Divorce (6/3/09) vs. Date Bankruptcy (Ch. 13 bankruptcy 9/2/2009) Judgment of Dissolution Maintenance $1250 per month Attorney s Fees $9, Equalization of Property $32, ARGUMENT Wife / Plaintiff Necessary Support Argument i.e. these debts are DSOs Husband / Defendant Division of marital property Argument Lump Sum Argument i.e. these debts are not DSOs Y--3 3

4 ISSUE Whether the debt (monthly maintenance and award of attorney s fees) is in the nature of alimony, maintenance or support as required under 101(14A)(C) Williams v. Williams (In re Williams), 703 F.2d 1055 Whether a particular debt is a support obligation or part of a property settlement is a question of federal bankruptcy law, not state law. How does the bankruptcy court decide? In re Hamblen, 233 B.R. 430,435 A divorce decree s characterization of an award as maintenance or alimony does not bind a bankruptcy court but is however a starting point for the determination of the award s intended function. Kruger v. Ellis (In re Ellis), 149 B.R. 925,927; Adams v. Zentz, 963 F.2d 197 When deciding whether a debt should be characterized as one for support or property settlement, the crucial question is the function the award was intended to serve. Y--4 4

5 Morgan v. Woods (In re Woods), 309 B.R. 22 Factors Considered Language Extrinsic evidence Financial conditions Employment histories and financial support Marital property Nature of the payments Difficulty to subsist without the payments How did the Court rule on the maintenance? Court thought Dissolution Judgment is clear State Court s Intent is clear Intent of payments Sufficient income to support family Court disagreed Lump Sum Argument Maintenance was not a division of marital property What about the attorney s fees? Rump v. Rump (In re Rump), 150 B.R. 450 An award of attorney s fees in a dissolution proceeding can be non dischargeable if the court determines that the award was in the nature of support. Williams v. Williams (In re Williams), 703 F.2d 1055 The courts tend to look at factors such as the disparities in the parties education, training, employment history or earning capacities. Y--5 5

6 COURT HOLDING I find that the debts relating to monthly maintenance payments and attorney s fees are in the nature of a domestic support obligation under 523(a)(5) and are therefore nondischargeable. Motion for Relief from Automatic Stay When is it appropriate to file? DEPENDS ON CHAPTER CHAPTER 7 Stay is in effect On Date of Filing (DOF) Terminates 45 days after 341 meeting date Discharged 90 days after DOF More Appropriate to wait CHAPTER 13 Stay is in effect On DOF Throughout life of BK Discharge comes 3 5 years after DOF Sometimes warrants Motion for Relief Y--6 6

7 MOTIONS FOR RELIEF FROM THE STAY USC 362(a)(1) and 362(b)(2) Relief is needed when: Proceed with Dissolution while BK case is pending Property is being transferred to 3 rd parties Property is being refinanced Relief is not needed when: Pursuing modification of child support orders EXAMPLES ASSET TRANSFERS Marital Home Refinancing Selling Retirement Distributions Rollovers Withdraws Loans OTHER ACTIONS Mediation Paternity Suits GAL Fees Modifications Redistribution of marital property Child support Other MRS Considerations Why do you need relief from the stay? Assets & debts cannot be divided and transferred in Dissolution Judgment w/o relief Potential for deconsolidation Filing fee for MRS is $150 Attorney s fees are in the ballpark of $5 600 Y--7 7

8 REFINANCING HOMES Homes required to be refinanced pursuant to Dissolution Judgment Bad Credit Debt to Income is off I forgot Costs of refinancing are too high QUITCLAIM DEEDS Purpose Client Expectations Liability relief vs. title transfer Refinance Sell Bankruptcy Nobleman Adversary Nobleman v. American Savings Bank, 113 S.Ct Lien Avoidance $0 of equity = void lien under Nobleman Appraisal Y--8 8

9 QUESTIONS? Please contact me at: Y--9 9