Frequently Asked Question About the Bankruptcy Act of 2005 & Divorce, Support, Marital Property & Debt.

Frequently Asked Questions About the Bankruptcy Act of 2005  (BAPCPA) & Divorce, Support, Marital Property and Debt.

The General Information Provided Is NOT Legal Advice. A Petition Filed in the United States Bankruptcy May Substantially Affect Proceedings Before the Superior Court of New Jersey – Family Part. If You Have Specific Concerns and Questions About Your Rights and Duties You Should Seek the Advice of Experienced Bankruptcy Counsel.

Q. What Information Must Be Provided About Support Obligations When Filing Bankruptcy?

A. Current Child Support and Alimony – Under the Act, support and alimony payments can not be discharged and a written notice at the time of filing a bankruptcy petition and a second notice at the time of discharge must be provided to the party to whom payments are made. In the notice, the United States Trustee must provide contact information for the bankruptcy debtor’s State Child Support Enforcement Agency.  If you are filing a Bankruptcy Petition and have a Domestic Support Obligation, you must provide complete information about your obligation.   This includes the name and contact information of the person who is receiving the support and confirm, in a document filed with the Court or provided to the Trustee, that the Court-ordered payments are current.  If you are receiving support payments, current support debts survive a bankruptcy without the need for you to have to go to Bankruptcy Court.   However, it is sometimes not clear whether or not a payment is in the nature of support. What constitutes alimony, maintenance, or support, will be determined under the bankruptcy laws, not State law.

Q. Who Decides Whether the Payments I Am Receiving or Which I Am Required to Pay Are Alimony or Support?

A. Whether or Not Payments Received Are For Alimony and/or Support Is A Question of Federal Law and is Therefore Decided By the Bankruptcy Court.

Most alimony and support payments are not subject to question and are entitled to the protections of Bankruptcy Code. However, payments which are “in the nature of support or alimony” have been the subject of considerable litigation. ” Two examples of when this question arises has been presented to the Bankruptcy Court are discussed below. These examples are for illustrative purposes only.

Example No. 1: Payment of Attorney Fees Incurred During Divorce Proceeding

“The divorce court awarded to the wife counsel fees in the amount of $85,000 to be paid by her former husband to the law firm that represented the wife, a sum that is calculated to level the playing field in the context of this unnecessarily prolonged litigation.  This sum shall be paid directly to [Ms. Prensky's] counsel in three equal installments, the first of which shall be paid on or before April 1, 2008. The two subsequent payments shall be made on July 1, 2008 and September 1, 2008 … The obligation to pay the $85,000 in legal fees (“Law Firm Indebtedness”) was separate from, and in addition to, orders to pay child support, maintenance, martial debt, and an additional sum of $185,850.”

Thereafter, the husband filed a Bankruptcy Petition and sought to discharge his obligation of payment to the law firm.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) amended 11 U.S.C. §§ 523(a)(5) and (a)(15) of the Bankruptcy Code. Sections 523(a)(15)(A) and (B) were eliminated; these sections previously allowed debtors to render dischargeable non-support obligations that were incurred in the course of a divorce or separation if the debtor did not have the ability to pay the debt, or if discharging the debt would have resulted in a benefit to the debtor that outweighed the detrimental consequences to the spouse, former spouse, or child. The debtor’s ability to pay is no longer a factor and bankruptcy courts  do not engage in any balancing test of whether a debtor would gain more than his or her domestic relations creditors if the debtor were granted a discharge

Under the New Code Sections 523 (a)(15) debt 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 government

Therefore the Bankruptcy Court found the the counsel fees that the Debtor was required to pay the the wife’s law firm to be a “divorce-related debt incurred by [Debtor] in the course . . . of the divorce proceedings between [Debtor and Ms. Prensky] and [is] non-dischargeable pursuant to 11 U.S.C. § 523(a)(15).” Prensky, 416 B.R. at 410-11. The judgment of the Bankruptcy Court was affirmed on appeal to the United States District Court Prensky v. Clair Greifer LLP, 2010 U.S. Dist. LEXIS 66181 (D.N.J. June 30, 2010).

Example No. 2: The Distribution of Marital Property In the Nature of Support

In DeHart v. Miller (In re Miller), 424 B.R. 171, the Bankruptcy Court was required to decide whether payments which were being made were support payments or payments for a party’s share of marital property.

The Debtor declared bankruptcy in April, 2009, and claimed that the $88,500 she was owed by her husband was not part of her bankruptcy estate under 11 U.S.C.S. § 522(d)(10)(D) because it was “alimony, support, or separate maintenance.

“Debtor’s marriage of ten years was dissolved by a divorce decree entered by the Court of Common Pleas of York County, Pennsylvania…The master’s report made recommendations for the resolution of economic issues concomitant to the dissolution of the marriage. In a section of the Report entitled “Recommendations with Respect to Equitable Distribution,” the divorce master recommended that 67% of the marital property be distributed to Debtor and the remaining 33% to Miller … After distributing specific property to each party, the divorce master determined that a “cash adjustment” of  $85,500.00 was required to effectuate this 67%/33% division of assets. Miller was given the option of paying the $88,500.00 in a lump sum or in monthly installments of $982.53 over nine years at 6%. … ” If a state court designates an award as something other than alimony, support or maintenance, this label does not control a bankruptcy court’s finding as to its true function. Smith v. Pritchett (In re Smith), 398 B.R. 715, 721 (B.A.P. 1st Cir. 2008).

The bankruptcy court agreed with the Debtor and held that the $88, 500.00 was exempt. “Although the master made that award in a section of his report labeled “Discussion and Conclusions of Law with respect to Equitable Distribution,” the language and substance of the report made it clear that the award was not just related to the debtor’s need for support; instead, it was founded on that need. In reaching its decision, the Court compared 11 U.S.C.S. §§ 522(d)(10)(D) and 523(a)(5) and found that it was appropriate to apply concepts used in both sections in a consistent manner.

Caution: The Question of Whether Payments Are Support or Alimony is fact sensitive and therefore requires a full analysis of all the facts and circumstance of the litigants, including but not limited to their income, assets, liabilities and obligations. Therefore, if there is any doubt about the how a debt arising out of a matrimonial proceeding is classified, you should seek the opinion of an attorney who practices in this area of the law.

Q.  Does the Filing of a Bankruptcy Petition During a Divorce Proceeding Stay Equitable Distribution of Marital Property by the New Jersey Superior Court-Family Part.

The equitable distribution of marital assets is stayed [put on hold] by the filing of a bankruptcy petition. However the Bankruptcy Court may grant a request to allow the State Court to proceed. “This Court recognizes the special expertise of the Family Part in dealing with issues of alimony, support, custody, and equitable distribution. Under the facts herein, that expertise should be allowed to function. In addition, notions of judicial economy predominate this Court’s decision to lift the automatic stay and permit the parties to proceed in the State Action … the State Court is intimately familiar with the parties’ conditions as they pertain to the divorce proceeding and stands ready to try the case … With respect to issues of equitable distribution, the State Court shall determine and fix the equitable distribution award while this Court shall retain jurisdiction to apportion assets set by the State Court as part of the Debtor’s continuing reorganization process.

In re Mattera, 2006 Bankr. LEXIS 4083 (Bankr. D.N.J. Feb. 6, 2006)

Caution:  It is important to understand that under the Law of New Jersey, the right of equitable distribution does not arise until a judgment of divorce is entered. This can create a very serious problem during a divorce proceeding.  One of many examples arises where property is titled in the name of one of the parties and that party filed a Bankruptcy Petition. Although the other party may have a claim to the property under New Jersey Law, the claim can be defeated  by the United States Trustee who represents the creditors  in the bankruptcy proceeding.

” … , at the moment of filing a bankruptcy petition the trustee is given superior rights as a hypothetical lien judgment creditor under § 544(a)(1). In order for a claim to survive the trustee’s strong arm powers, the moving party must show a right to the property before commencement of the bankruptcy case. In New Jersey, pursuant to N.J.S.A. § 2A:34-23, the right to equitable distribution does not arise until the entry of the judgment of divorce. In re Howell, 311 B.R. 173, 176 (Bankr.D.N.J. 2004), citing In re Berlingeri, 246 B.R. 196 (Bankr.D.N.J.2000); Carr v. Carr, 120 N.J. 336, 576 A.2d 872 (1990). The prospective right[*7]  to equitable distribution is not an interest that can defeat the superior rights of a trustee in bankruptcy.” Buccolo v. Buccolo (In re Buccolo), 2006 Bankr. LEXIS 4078, 11-12 (Bankr. D.N.J. Jan. 11, 2006)

Q.  Can a Debt that Arises from a Divorce Proceeding ever be Discharged in a Bankruptcy Case?

A.  Yes. Although, as discussed above, debts which are in the nature of “alimony, maintenance, and support” (“Domestic Support Obligations”) cannot be discharged in any bankruptcy case, other debts arise out of a divorce from a bankruptcy case.    Specifically, debts which are 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”.  11 USCS § 523(a)(15).   Although these debts are not dischargeable in a Chapter 7 Bankruptcy Case, they may be dischargeable in a Chapter 13 Bankruptcy case.

Chapter 13 Bankruptcy cases involve a reorganization – a debt repayment plan – in which the Debtor is required to commit his or her income to creditors for a period of between 36 and 60 months. In such a case, a debt which is owed “to a spouse, former spouse, or child of the debtor and not” in the nature of “alimony, maintenance, and support” (“Domestic Support Obligation”), may be discharged.    Bankruptcy Code Section 1328(a)(2) clarifies that certain debts, which would otherwise not be discharged in a Chapter 7 bankruptcy case, can be discharged in a Chapter 13.    This is often referred to as the “Super-Discharge” available in Chapter 13 cases.

Therefore, when considering the effect of a bankruptcy filing (by either spouse), it is also important to review options regarding the Chapters of bankruptcy available.

EXTREME CAUTION:  The Legal Questions posed by whether a “debt” owed is in the nature of “alimony, maintenance, and support” is fact sensitive and therefore requires a full analysis of all the facts and circumstance of the litigants, including but not limited to their income, assets, liabilities and obligations.    The determination of whether any person should file a bankruptcy, and what chapter of bankruptcy is appropriate, should also be reviewed with experienced legal counsel.

Marital Debt to Third Parties

Any debts resulting from an agreement by the debtor to hold the debtor’s spouse harmless on joint debts, to the extent that the agreement is in payment of alimony, maintenance, or support of the spouse, as determined under bankruptcy law considerations that are similar to considerations of whether a particular agreement to pay money to a spouse is actually alimony or a property settlement are non dischargeable-.

EXTREME CAUTION:  Unfortunately parties in a divorce proceeding sometime seek to use the filing a a bankruptcy petition as a litigation strategy  or simply to  express their vindictive feelings toward their spouse. The result can be extremely detrimental to one or both of the parties. If you owe or are owed non support obligations arising from a property settlement or a Final Judgment of Divorce, you need the advice and counsel of an attorney who practices in this area of the law .  It has been our experience those who do not very promptly seek legal representation are substantially and negatively affected.