Divorce: When a Spouse or

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1 Presenting a live 90 minute webinar with interactive Q&A Divorce: When a Spouse or Former Spouse Files Bankruptcy Understanding the Impact of Bankruptcy on Domestic Support Obligations, Property Settlements, and Taxes WEDNESDAY, JULY 18, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Shayna M. Steinfeld, Attorney, Steinfeld & Steinfeld, Atlanta Ian M. Falcone, Attorney, The Falcone Law Firm, Marietta, Ga. Vivian Hoard, Attorney, Taylor English Duma, Atlanta The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

2 Quick Overview of Bankruptcy-Divorce Provisions Under BAPCPA by Shayna M. Steinfeld Steinfeld & Steinfeld, PC 1 The Bankruptcy laws were overhauled by Congress by a substantial amendment to the Bankruptcy Code in April of This overhaul, known as the Bankruptcy Abuse and Credit Prevention Act of 2005 ( BAPCPA ) became effective on October 17, BAPCPA is legislation that is not well drafted and has significant consequences, mostly negative, on parties in a bankruptcy case filed after that date. One of the primary beneficiaries of BAPCPA re exspouses who generally have better treatment under the 2005 provisions than they have had previously. One of the first changes under BAPCPA is a new definition for a Domestic Support Obligation 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 [bankruptcy filing]..., including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision [of the Bankruptcy Code], that is (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 afer the [Bankruptcy filing]..., by reason of applicable provisions of- (i) a separation agreement, divorce decree, or property settlement agreement (ii) an order of a court of record; or (iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and (D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child's parent, legal 1 31 Lenox Pointe, NE, Atlanta, GA / ; [email protected]. These materials are from those written by the author and supplied annually to Dan McConnoughy for a chapter on bankruptcy in his annual treatise on Georgia Domestic Relations. law. 1

3 guardian, or responsible relative for the purpose of collecting the debt. 11 U.S.C. 101(14A)(hereinafter DSO ). This definition would appear to encompass the prior definition utilized in bankruptcy for obligations that are in the nature of support and that case law in its many contexts but also appears to be significantly broader, also encompassing obligations that are capable of being assessed in the future and owed to any individual caring for a child. The definition of a DSO is then utilized throughout the rest of the Bankruptcy Code under BAPCPA. DSO payments are not dischargeable from a bankruptcy case under any chapter of the Bankruptcy Code; 2 consequently, even though a debtor ex-spouse has filed a bankruptcy case and a general notice of stay against creditors has issued, 3 the debtor does not have the ability to escape a DSO, including alimony and other support obligations. The debtor, may, however, restructure the repayment of past-due DSO arrearages over the life of a bankruptcy reorganization (e.g. under a confirmed Chapter 11, 12 or 13 Reorganization plan). The debtor must, however, maintain on-going post-petition 4 DSO payments (alimony and child support) during any bankruptcy case. 5 Non-DSO debts, such as some hold harmless agreements on credit cards, or on the division of a business asset or other assets, used to be non-dischargeable in a Chapter 7, 11 or 12 case if the ex-spouse filed a complaint and successfully litigated entitlement to exclusion from discharge pursuant to 11 U.S.C. 523(a)(15). BAPCPA amended 523(a)(15) to provide for the automatic 6 non-dischargeability of these non-dso obligations from Chapter 7, 11 and 12 cases. The net effect being that all divorce-related obligations are automatically non-dischargeable from a discharge issued under Chapter 7, 11 or 12. These 2 A debtor in bankruptcy may receive a discharge from debts included in the case (generally arising prepetition) unless they are excluded from discharge under the Bankruptcy Code or the discharge is denied. See 11 U.S.C. 727, 1141, 1228 and The discharge creates an injunction which bars creditors from collecting discharged debts. 11 U.S.C Pursuant to 11 U.S.C. 523(a)(5), DSO debts are non-dischargeable and pursuant to 11 U.S.C. 523( c), there is no need for a complaint to be filed the exclusion from discharge is automatic. 3 The automatic stay of 11 U.S.C. 362(a) prohibits contact, collection, law suit and harassment of the debtor by creditors thereby protecting the debtor from folks trying to collect debts. 4 Post-petition refers to those arising after the filing of the case U.S.C. 1129(a)(14); 1225(a)(7); 1325(a)(8) and 1328(a) U.S.C. 523( c) moots the necessity for filing a complaint under BAPCPA for non-dso Obligations, complaints are still necessary for the non-discharge of other obligations, such as those incurred by fraud, embezzlement, breaches of fiduciary duty and willful and malicious injury arising under other provisions of 11 U.S.C. 523(a). 2

4 non-dso debts remain dischargeable from Chapter If, however, the obligation was incurred by fraud, breach of fiduciary duty, willful and malicious injury or embezzlement (or for other grounds suggested by 11 U.S.C. 523(a)(2), (3), (4), (8) or (9)), a complaint must be filed by the creditor-ex-spouse early in the bankruptcy case (under any chapter) and must be litigated for successful exclusion from the discharge. This will be particularly important for divorce-related obligations in Chapter 13 (the only remaining avenue for an ex-spouse to eliminate any divorce-related obligation). DSO claims have always been entitled to priority payment in a bankruptcy case pursuant to 11 U.S.C. 507(a). BAPCPA improves this priority by moving it from a 7 th priority claim to a 1 st priority claim, with the ability of the Trustee to be paid for his or her time and effort in putting together assets with which to pay the claim (the Trustee s administrative claim). 8 A Proof of Claim must be timely filed in the bankruptcy case in order for the claim to be paid. Accordingly, it is important for the creditor ex-spouse to participate in the case from its filing and not to ignore it. Another new and interesting provision of BAPCPA is one that appears to authorize the Trustee to liquidate exempt assets, generally unavailable for payment of claims, to pay a past-due DSO obligation. 9 BAPCPA also expands the exceptions to the automatic stay in the divorce context. There has been no automatic stay that prohibits the non-filing, creditor, ex-spouse from continuing or commencing an action to pursue the establishment of paternity; or the establishment or modification of an order for alimony, maintenance or support; or to collect alimony, maintenance or support from property that is not property of the estate [e.g. post-petition income in a Chapter 7 case]. 10 Further, there has been an exception to the stay (or discharge) for any criminal actions. 11 There is a very fine line between a criminal contempt action and a civil contempt action the general rule is that if it is in essence an action to force the repayment of a past-due debt; its civil and the automatic stay applies if it seeks to uphold the dignity of the court, it could be criminal and the stay may not apply. It may be very costly to assume that an action is criminal in nature and wind up in litigation with the debtor over the determination. 12 The simpler course is to get an Order from the Bankruptcy 7 11 U.S.C. 1328(a)(2). 8 11U.S.C. 507(a)(1) U.S.C. 522(c)(1) U.S.C. 362(b)(2) U.S.C. 362(b)(1) and 11 U.S.C. 523(a)(13)(restitution) (incorporated into 11 U.S.C and 1228); 11 U.S.C. 1328(restitution and crime) and... (from text) 12 For an excellent example of what could happen, even when the action is filed by the County and turns out to be criminal in nature and not stayed after years of litigation, see, In re Rollins, 243 B.R. 540 ( N.D. Ga. 1997), aff d, 140 F.3d 1043 (11 th Cir. 1998) and the underlying bankruptcy court opinion, which was reversed and affirmed on appeal, found at 200 B.R. 427 (Bankr. N.D.Ga. 1996). 3

5 Court lifting the automatic stay pursuant to 11 U.S.C. 362(d) to enable the contempt action to proceed rather than risking contempt of the bankruptcy stay. BAPCPA retains this law and adds five other exceptions to the automatic stay in the divorce/post-divorce/dso collection context. 13 The net result appears to be that the intent of Congress is for the automatic stay to apply only to the division of marital/estate property and to the collection of any DSO from property of the estate. The conservative lawyer will, however, continue to get the stay lifted prior to proceeding on any divorce-related actions in superior court in order to avoid being hauled back to bankruptcy court for a violation of the stay and being subject to sanctions. It will be interesting to see how the BAPCPA law develops in this context. BAPCPA also limits the automatic stay in bankruptcy cases filed by a debtor who is not filing his or her first bankruptcy case within the year. 14 If an issue arises as to whether a debt is a DSO and, therefore, non-dischargeable from a Chapter 13, the Superior Court should ordinarily defer the enforcement proceeding until the Bankruptcy Court has ruled on the specific question. The Superior Court may have concurrent jurisdiction with the Bankruptcy Court to make a determination that a debt is in the nature of support and that the stay does not apply. 15 If, however, the Bankruptcy Court U.S.C. 362(b)(2)( C), (D), (E), (F) and (G): (C) with respect to the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute; (D) of the withholding, suspension, or restriction of a driver's license, a professional or occupational license, or a recreational license, under State law, as specified in section 466(a)(16) of the Social Security Act [142 USCS 666(a)(16)]; (E) of the reporting of overdue support owed by a parent to any consumer reporting agency as specified in section 466(a)(7) of the Social Security Act [42 USCS 666(a)(7)]; (F) of the interception of a tax refund, as specified in sections 464 and 466(a)(3) of the Social Security Act [42 USCS 664 and 666(a)(3)] or under an analogous State law; or (G) of the enforcement of a medical obligation, as specified under title IV of the Social Security Act [42 USCS 601 et seq.] U.S.C. 362(c)(3) and (4). 15 Courts holding that only the bankruptcy court has jurisdiction include: Gruntz v. County of Los Angeles (In re Gruntz), 166 F.3d 1020, reh g granted, 177 F.3d 729 (9 th Cir. 1999); Rainwater v. State of Alabama (In re Rainwater), 233 B.R. 126 (Bankr. N.D.Ala. 1999); In re Raboin, 135 B.R. 682 (Bankr. D.Kan. 1991), and In re Sermersheim, 97 B.R. 885 (Bankr. N.D.Ohio 1989). Courts holding that there is concurrent jurisdiction between the state court and the bankruptcy court include: H.U.D. v. Cost Control Marketing & Sales Management of Virginia, Inc., 64 F.3d 920 (4 th Cir. 1995); Picco v. Global Marine Drilling Co., 900 F.2d 846 (5 th Cir. 1990); Brock v. Morysville Body Works, Inc., 829 F.2d 383 (3d Cir. 1987); Hunt v. Bankers Trust Co., 799 F2d 1060 (5 th Cir. 1986); NLRB v. Edward Cooper Painting, Inc., 804 F.2d 934 (6 th Cir. 1986); Erti v. Paine Webber, Jackson & Curtis, Inc. (In re Baldwin-United Corp. Litig.), 765 F.2d 343 (2 nd Cir. 1985); In re Glass, 240 B.R. 782 (Bankr. M.D.Fla. 1999); Pope v. Wagner (In re Pope), 209 B.R (Bankr. N.D.Ga. 1997); and Martinez v. Buckley (In re Martinez), 227 B.R. 442 (Bankr. D.N.H. 1998). 4

6 rules that the debt is discharged, such finding is res judicata as to the state court proceedings. A similar rule of deference should apply to the Superior Court if the question of discharge is a close one. In determining whether the debt is non-dischargeable, as being in the nature of support, the court (state or federal) should look at the intent of the parties in creating the obligation in question, along with state law factors that would entitle a spouse to alimony or support, including looking at the decree in its entirety, considering all pertinent facts and circumstances, including parol evidence, if the decree is ambiguous. 16 This analysis may also be relevant in determining priority payment on DSO claims in Chapter 7, 11 and 12 as non-dso debt is also non-dischargeable from these chapters but DSO debt is paid at a higher priority (sooner rather than later). A bankruptcy discharge may provide a basis to modify a support or alimony award postpetition based on the changed circumstances in the debt the debtor is now obligated to pay. This, however, risks running afoul of the bankruptcy discharge and should be very carefully undertaken so as not to result in being in contempt of the bankruptcy court. 17 A Georgia award of a share of a former spouse s military pension and a division of retirement funds pursuant to a QDRO as an equitable division of property are generally not considered to be a debt subject to discharge, as the Courts determine that the divorce decree/settlement agreement effects a transfer of title of these funds from the debtor to the creditor-spouse The are over 20 factors that a bankruptcy court will look to (not every court will look at every factor) to determine the true nature of an obligation as support. See, e.g. In re Robinson, 193 B.R. 367 (Bankr. N.D.Ga. 1996); In re MacDonald, 194 B.R. 83 (Bankr. N.D.Ga. 1996); Ackley v. Ackley (In re Ackley), 186 B.R (Bankr. N.D.Ga. 1995); rev'd, 187 B.R. 24 (N.D.Ga. 1995); Nix v. Nix (In re Nix), 185 B.R. 929 (Bankr. N.D.Ga. 1994); Myers v. Myers (In re Myers), 61 B.R. 891 (Bankr. N.D.Ga. 1986); and In re Edwards, 33 B.R. 944, 946 (Bankr. N.D.Ga. 1983). 17 See, e.g. In re Siragusa, 27 F.3d 406 (9th Cir. 1994); In re Trickey, 598 N.W.2d 753 (Iowa App. 1998); Marriage of Myers, 54 Wash. App. 233, 773 P.2d 188 (1989); In re Marriage of Eckert v. Eckert, 144 Wis.2d 770, 424 N.W.2d 749 (1988); Marriages of Foster v. Childers, 416 N.W.2d 781(Minn.App. 1987); Kruse v. Kruse, 464 N.E.2d 934 (Ind.App. 1984). 18 On Military Benefits: Albert v. Albert (In re Albert), 194 B.R. 907 (D.Kan. 1996)(exwife s interest in debtor-husband s military retirement pay was her sole and separate property); In re Hall, 51 B.R (S.D.Ga. 1985)(military retirement benefits awarded by a jury to debtor's ex-wife as an equitable division of marital assets -- 38% of the fund -- was actually in the nature of support and was, therefore, nondischargeable) and In re Ledvinka, 144 B.R. 188 (Bankr. M.D.Ga. 1992)(ex-wife's 50% interest in husband-debtor's retirement plan was wife's sole and separate property and was not subject to discharge); see also, In re Sadowski, 144 B.R. 566 (Bankr. M.D. Ga. 1992) and In re Farrow, 116 B.R. 310 (Bankr. M.D.Ga. 1990). Pension/retirement funds: see, e.g. Patterson v. Shumate, 112 S.Ct (1992); Taunt v. General Retirement system of the city of Detroit (In re Wilcox), 233 F.3d 899 (6 th Cir. 2000); Meehan v. 5

7 Attorney s fees awarded in connection with collection an alimony or child support award are generally in the nature of alimony, support, and are non-dischargeable. 19 Although, the federal courts frequently employ the doctrine of abstention to avoid entanglement with domestic relations issues, this is not generally true in bankruptcy cases. Wallace (In re Meehan), 102 F.2d 1209 (11th Cir. 1997); In re Yuhas, 104 F.3d 612 (3d Cir. 1997); In re Connor, 73 F.3d 258 (9 th Cir), cert. dend. 117 S.Ct. 68 (1996); In re Rueter, 11 F.3d 850 (9 th Cir. 1993); and Whetzal v. Alderson, 32 F.3d 1302 (8 th Cir. 1994). 19 Strickland v. Shannon (In re Strickland), 90 F.3d 444 (11th Cir. 1996). This may not be the case if the fees are awarded for abusive litigation under O.C.G.A or as some other penalty against a filing party. In such a case a complaint under other provisions of 11 U.S.C. 523(a) in a Chapter 7, 11 or 12 case may be wise. 6