The Top Ten Things th Attorney Should Know Recent Changes in Ban BY roger m. baron 1 and cassidy m. stalley 2 Roger M. Baron Cassidy M. Stalley In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). 3 Its enactment brought several changes to the bankruptcy code, many of which have had a direct impact on family law. As a result, the family law attorney would be wise to become acquainted with the relevant changes. The courts have now had roughly five years to review cases brought under the new provisions. This article addresses the 10 most notable changes. 1. Concept of Domestic Support Debts Broadened Section 523(a) of the bankruptcy code sets forth all non-dischargeable debts. 4 With BAPCA s enactment, 11 U.S.C. 523(a)(5) 5 utilizes the new term domestic support obligation, or DSO, and it has significantly broadened the protection afforded support-related debts. Now excluded from discharge are all marital and domestic relations debts regardless of whether the debt was in the nature of support or property incurred in connection with a separation, divorce, or related action. 6 As a result, family bankruptcy creditors (spouses, former spouses, and legal guardians) have additional protection in a Chapter 7 proceeding. The 8th Circuit Court of Appeals recently stated, Whether a particular debt is a support obligation or part of a property settlement is a question of federal bankruptcy law, not state law and further held that exceptions from discharge should be liberally allowed. 7 Interest that accrues on a DSO is also defined to be included as part of the DSO 8 and is protected on a priority basis. 9 A penalty assessment for late payment of a DSO has not, however, been considered part of the DSO accordingly, such penalty assessments are dischargeable in bankruptcy. 10 2. Domestic Support Obligations BAPCPA s enactment introduced the term domestic support obligation (DSO). To fully appreciate the significance of this new term, the family law attorney must become familiar with 101 (14A), which provides its definition. 11 The first thing the family law attorney must recognize is that the definition broadens the scope of who qualifies as a bankruptcy creditor: a spouse, former spouse, or child of the debtor or such child s parent, legal guardian, or responsible relative; or governmental unit. 12 This language provides protection for a direct award of attorney s fees to an attorney representing a custody 170 / Journal of the Missouri Bar
e Family Law About the kruptcy Law litigant. 13 Another notable change is that this definition now allows for the voluntary assignment of DSOs to nongovernmental entities for the purposes of collecting debt. Arguably, this is potentially harmful to spouses, former spouses, and children of debtors whose support obligations have been traditionally exempt from claims made by creditors. 14 3. Elimination of Defenses Under pre-bapcpa, the defenses set forth in 11 U.S.C. 523(a) (15) allowed many marital debts to be discharged. 15 Under the prior version, marital non-support debts, such as debts related to property division, were dischargeable based upon the inability to pay criterion of former 523(a)(15)(A) or on the benefit outweighs the detrimental consequences criterion of former 523(a)(15)(B). The BAPCPA eliminated these defenses. 16 As a result, there is less chance that marital non-support debts will be declared non-dischargeable. 4. Discharge of 523(a)(15) Marital Debts Allowed in Chapter 13 A debtor may still obtain a discharge of 523(a)(15) marital debts if filing under Chapter 13 bankruptcy. This is because 1328(a), which was unchanged by BAPCPA, permits those debtors who obtain and complete confirmed planned payments to discharge 523(a)(15) debts. 17 To protect the nondebtor spouse who may be affected, the family law attorney will want to object to the debtor s plan and, if possible, file a complaint to determine if the debt is a nondischargeable DSO under 523(a)(5). Take note, however, that a recent federal case in Minnesota permitted the discharge of a cash equalizer payment imposed on a husband in order to effectuate an equitable property division. 18 This same decision permitted the discharge of two attorney fee assessments against the husband because the awards were considered to be conduct-based (as in bad conduct by the husband) and therefore not constituting a support obligation. 19 It should also be noted that if a divorce litigant wishes to protect a property division May-June 2011 / 171
cash equalizing payment from being dischargeable through Chapter 13, such may be accomplished through the simultaneous creation of a secured interest or mortgage/lien on the property being awarded to the other spouse. 20 5. Priority of Domestic Support Obligations DSOs now hold top priority. 21 (DSOs were previously seventh in priority.) This means that a spouse, former spouse, child, or other responsible relative is entitled to first priority, while debts owed to or recoverable by a governmental unit are next in line. But all DSOs, regardless of to whom owed, are superseded by 507(a)(1)(C), which requires the administrative expenses of a trustee to be paid before any payments are made to DSOs creditors. 22 In addition, certain provisions in Chapter 13, such as those that provide for the payment of the debtor s attorney s fees prior to payment of DSOs, could also displace DSO s top priority. And while DSOs are now afforded first priority, the same is not true for 523(a)(15) marital debts, which receive no special priority. 6. Eleven Exceptions to the Automatic Stay There are now 11 different exceptions to the automatic stay found in 362(b) all of which are helpful to the family law attorney. 23 First, the family law attorney should know that BAPCPA retained the pre-bapcpa exceptions. 24 But exceptions have been added for proceedings that involve child custody or visitation, the dissolution of marriage (except to the extent that such proceedings seek division of property that is property of the bankruptcy estate), and domestic violence. In addition, BAPCPA added several exceptions that serve as enforcement tools for the collection of DSOs. These include such things as: income withholding; revoking or non-renewal of certain licenses of the debtor; notifying credit reporting agencies; intercepting tax refunds; and collecting medical support obligations. 7. Increase Accountability Imposed on Attorneys BAPCPA adds to Rule 9011 of the Federal Rules of Bankruptcy Procedure (a rule similar to Federal Rule 11) two new provisions which make attorneys potentially liable for any errors in the debtor s documents in Chapter 7 cases: 11 U.S.C.A. 707(4)(C) and 11 U.S.C.A. 707(4)(D). Besides attesting to the good faith nature of the bankruptcy petition, these two sections require all attorneys (not just those specializing in bankruptcy) to certify the accuracy of their clients bankruptcy schedules and list of assets, as well as the ability to make payments, or face sanctions. Some speculate that, because of this, attorneys will visit their clients homes with video cameras or even hire their own appraisers to document and protect themselves from liability. It has also been suggested that these provisions may cause malpractice insurance premiums to go up, decrease the number of attorneys who are willing to take on bankruptcy cases (especially those who do pro bono work), and generally increase costs to the consumer. 8. Debt Relief Agencies Regardless of whether or not one considers oneself a bankruptcy attorney, an understanding of the provisions of 528 would be useful to all attorneys. 25 This is because 528 contains the requirements for debt relief agencies (DRA). Section 101(12A) defines a DRA as: any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer under section 110. 26 The family law attorney should be aware that bankruptcy assistance includes any goods or services sold or otherwise provided to an assisted person such as advice or representation, document preparation, or filing, or attendance at a creditors meeting or the like, in connection with a case or proceeding under the bankruptcy code. 27 Arguably, an attorney would be considered a DRA (and would, therefore, have to comply with all DRA provisions) if the attorney simply provided information or advice to a client whose ex-spouse (or soon to be ex-spouse) had just filed for bankruptcy. Milavetz v. United States, a recent Supreme Court decision, actually confirms this proposition by holding that attorneys who provide bankruptcy assistance to assisted persons are debt relief agencies within the meaning of the BAPCPA. 28 9. Concurrent Jurisdiction and Timing There is now concurrent jurisdiction between federal bankruptcy courts and state family law courts for 523(a)(15) debts; federal court had exclusive jurisdiction pre-bapcpa. 29 BAPCPA has also amended the timing requirements for 523(a)(15) claims, allowing a party to commence an adversary proceeding at anytime. 30 (A party was previously required to file within 60 days after the first date set for the meeting of creditors pre-bapcpa.) 10. Governmental Units Ability to Recover Expenses Under 101(14A), if a governmental unit has incurred expenses by providing assistance or benefits to support the debtor s spouse, a former spouse, or child, those expenses are now considered DSOs and are non-dischargeable. 31 With BAPCPA enactment, there have been many changes made to the bankruptcy code. These changes have added more protection for spouses, former spouse, children of debtors, and even governmental units. Today s family law attorney would be wise to become informed as to these new developments. Endnotes 1 Professor of Law, University of South Dakota School of Law. Professor Baron is licensed in Missouri, Texas and South Dakota. He may be 172 / Journal of the Missouri Bar
reached by e-mail at Roger.Baron@usd.edu. 2 Cassidy M. Stalley, JD, May 2011, University of South Dakota School of Law. Ms. Stalley obtained her undergraduate degree in criminal justice from the University of Mary, in Bismarck, North Dakota. Before attending the University of Mary, however, she played soccer for the University of Missouri-St. Louis for three years. This article is a modified version of a more in-depth paper written by Ms. Stalley during her third year of law school, as an Advanced Legal Research project, under the direction of Professor Roger Baron. Ms. Stalley may be reached, by e-mail, at cassidy.stalley@gmail.com. 3 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (2005). 4 11 U.S.C. 523(a). 5 Prior to BAPCPA, 11 U.S.C. 523(a)(5) exempted from discharge any debt: to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with State or territorial law by a governmental unit, or property settlement agreement, but not to the extent that (A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise (other than debts assigned pursuant to section 408(a)(3) of the Social Security Act, or any such debt which has been assigned to the Federal Government or to a State or any political subdivision of such State); or (B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support[.] See http://doney.net/bkcode/11usc0523. htm. Under BAPCPA, 523(a)(5) now simply exempts any debts for domestic support obligation ( DSO ). 11 U.S.C. 101 (14A) defines domestic support obligation as: a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, 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 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 a court of record; (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 guardian, or responsible relative for the purpose of collecting the debt. 6 11 U.S.C. 523(a)(15) has been amended so as to pick up debts related to divorce and separation even though they are not in the nature of support. The current version of 11 U.S.C. 523(a)(15) is set forth in footnote 16. 7 In re Phegley, 443 B.R. 154 (B.A.P. 8th Cir. 2011), affirming the U.S. Bankruptcy Court for the Western District of Missouri in its ruling that husband s monthly maintenance payments of $1,125 per month for 48 months and his obligation to pay $9,178.69 of wife s attorney fees were excepted from discharge, stating, Exceptions from discharge for spousal and child support deserve a liberal construction, and the policy underlying 523 favors the enforcement of familial obligations over a fresh start for the debtor, even if the support obligation is owed directly to a third party. Id. at 158. 8 11 U.S.C. 101(14A). 9 In Re Wright, 438 B.R. 550 (Bankr. M.D.N.C. 2010). 10 In re Smith, 586 F.3d 69 (1st Cir. 2009) (permitting the discharge of $50 per diem penalty assessment for late alimony payments). 11 11 U.S.C. 101(14A). 12 Id. 13 In the case of In Re Sullivan, 423 B.R. 881(Bankr., E.D. Mo.), an attorney had represented the mother of the debtor s two children in May-June 2011 / 173
a custody-related matter which was instigated by the debtor. After the debtor failed to attend a pretrial settlement conference, the trial court dismissed the debtor s petition and ordered him to pay the attorney s fees the mother had incurred. A few months after this action had occurred, the debtor filed a petition under Chapter 7 of the Bankruptcy Code. At that time, the debtor still had not paid the attorney fees and subsequently the attorney filed a complaint requesting that the court declare that debt a nondischargeable DSO. The court found for the attorney, holding that attorney s fee award arising from litigation involving child support is considered a DSO, even if paid directly to the attorney. 14 Claude R. Bowles, Expecting the Unexpected: Unusual Domestic Relations Law Issues That May Arise Under the BAPCPA, 41 Fa m. L.Q. 343, 347-8 (2007). A fourth major change made by 11 U.S.C. 101(14A) permits nongovernmental otherwise non-eligible parties that have been assigned voluntarily support obligations for the purpose of collecting the debt which otherwise qualify as DSOs, to file 11 U.S.C. 523(a)(5) actions against debtors and hold DSOs. This change is potentially harmful to the spouses, former spouses and children of debtors holding DSOs as under most state laws, alimony and child support obligations (which are DSOs) are generally exempt from the claims of creditors. However, if such claims can be voluntarily assigned to creditors of spouses, former spouses of debtors, and possibly even legal guardians or responsible relatives of children of a debtor, for purposes of collection and payment of those debts, then the ability to exempt DSOs may be lost. 15 Section 523(a)(15) prior to BAPCPA provided that a debtor may discharge marital debt if: (A) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor and, if the debtor is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business; or (B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor[.] 16 11 U.S.C. 523(a)(15) now simply states that a debtor cannot discharge any debt owed: to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit[.] 17 11 U.S.C. 1328(a). 18 In Re Nolan, Slip copy, 2010 WL 3926870 (D. Minn., October 1, 2010) at *1. 19 Id. 20 Compare Grode v. Grode, 543 N.W.2d 795, 803-804 (S.D. 1996) (finding reversible error in the trial court s failure to award wife a secured interest in real property awarded to husband, stating at 804, This court [has] recognized that property division payments are dischargeable in bankruptcy. Therefore, by not giving Rose a security interest, the trial court has left Rose in an unsecured position if Bruce declares bankruptcy. (citation omitted.) 21 11 U.S.C. 507(a)(1)(A)-(B). 22 11 U.S.C. 507(a)(1)(C). 23 11 U.S.C. 362(b) now provides that filing of the petition does not operate as a stay: (2) under subsection (a) (A) of the commencement or continuation of a civil action or proceeding (i) for the establishment of paternity; (ii) for the establishment or modification of an order for domestic support obligations; (iii) concerning child custody or visitation; (iv) for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate; or (v) regarding domestic violence; (B) of the collection of a domestic support obligation from property that is not property of the estate; (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; (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; (F) of the interception of a tax refund, as specified in sections 464 and 466 (a) (3) of the Social Security Act 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[.] 24 Section 362(b) prior to BAPCPA only allowed exceptions to the stay (2) under subsection (a) of this section (A) of the commencement or continuation of an action or proceeding for (i) the establishment of paternity; or (ii) the establishment or modification of an order for alimony, maintenance, or support; or (B) of the collection of alimony, maintenance, or support from property that is not property of the estate[.] See http://doney.net/bkcode/11use0362.htm. 25 11 U.S.C. 528. 26 11 U.S.C. 101(12A). 27 11 U.S.C. 101(4A). 28 Milavetz v. United States, 130 S.Ct. 1324, 1333 (2010). 29 11 U.S.C. 523(c) (deleting 523(a) (15) debts from the list of exclusive jurisdiction exceptions created concurrent jurisdiction). 30 Lynne F. Riley & Maria C. Furlong, The Complex Intersection of Divorce and Bankruptcy in the 21st Century, No r t o n Jo u r n a l o f Ba n k- r u p t c y Law a n d Pr a c t i c e, 16 J. Ba n k r. L. & Pr a c. 2 Art. 1 (2007). 31 11 U.S.C. 101(14A). 174 / Journal of the Missouri Bar