Divorce and Bankruptcy

Whether you are considering a bankruptcy due to a prior or pending divorce or you require an understanding of bankruptcy as it would relate to your divorce proceedings, hiring an experienced bankruptcy attorney is essential to review your circumstances with an experienced New Jersey Bankruptcy Attorney who can advise you of your legal rights. In some cases, we have represented married couples who are considering divorce proceedings but want to make their best efforts to address their debts together to allow them the best opportunity to support themselves and their children in the future.

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 child and/or spousal support payments are not subject to question and are deemed protected non-dischargeable debt under the Bankruptcy Code.  However, payments which are “in the nature of support or alimony” have been the subject of considerable litigation.

The cases discussed below are examples of how these issues have been addressed by Bankruptcy Courts.  Whether any specific payment would be deemed Alimony or Support is fact-sensitive and requires an analysis with a New Jersey Bankruptcy Attorney who has experience in addressing matrimonial debts.

Example No. 1: Payment of Attorney Fees Incurred During Divorce Proceeding:   A New York divorce court ruled that a former husband was required to pay $85,000 in legal fees to the ex-wife’s lawyer which the divorce court found was “calculated to level the playing field in the context of this unnecessarily prolonged litigation.”  See Prensky v. Clair Greifer LLP, 2010 U.S. Dist. LEXIS 66181 (D.N.J. June 30, 2010).   The husband was required to pay this amount in three payments directly to the law firm.    This payment was in addition to orders to pay child support, maintenance, martial debt, and an additional sums.   Thereafter, the husband filed a Bankruptcy Petition in New Jersey and sought to discharge his obligation of payment to the law firm.

The New Jersey District Court affirmed the Bankruptcy Court’s holding that the debt was not dischargeable.   However, the Court did not find that the Law Firm Indebtedness was “alimony” or “support”.    Instead, it held that  under the Code § 523 (a)(15), it was “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”.   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.

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”.     The bankruptcy court agreed with the Debtor and held that $88, 500.00 was exempt from the reach of the creditors and Trustee in the case.

A divorce decree entered by the Court of Common Pleas of York County, Pennsylvania included a master’s report.   n 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%. … ”  The Bankruptcy Court found that “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 Court read the actual language and substance of the report, rather than the label, to deem the payment to be “not just related to the debtor’s need for support” but “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.

These examples highlight the importance of reviewing these issues with a New Jersey Bankruptcy Attorney who has experience in addressing matrimonial debts and awards.

 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.   One New Jersey Bankruptcy Court addressing this issue noted the relationship between the bankruptcy and the distribution of martial property in a divorce action.   In In re Mattera, 2006 Bankr. LEXIS 4083 (Bankr. D.N.J. Feb. 6, 2006), the Court recognized “the special expertise of the Family Part in dealing with issues of alimony, support, custody, and equitable distribution”, in holding that 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.”

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.   As the Court noted: ”… , 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 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 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” are fact-sensitive and  require an analysis of all facts and circumstances of the litigants, including 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.

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.