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FAQ'S

Family Law and Bankruptcy

1. How does bankruptcy affect a divorce?

Family law and bankruptcy seem to go together like Batman and Robin. Upon splitting up, either the spouses can’t pay the family debts, or one spouse seeks to use bankruptcy as a weapon against the other spouse, or the other spouse’s lawyer.

For those divorcing or divorced, the bankruptcy issues generally fall into three categories; 1) The payment of child support and alimony after a bankruptcy has been filed; 2) The enforceability of a property settlement agreement after a bankruptcy has been filed; and 3) What happens to a joint credit card debt if only one spouse files for bankruptcy.

2. Can my ex‑husband escape paying for child support and alimony by filing for bankruptcy?

The Bankruptcy Code attempts to protect the rights of children and former spouses to collect support. Any support whether it is called family support, alimony, or child support, the Bankruptcy Code makes it non‑dischargeable in bankruptcy. The spouse who receives the support does not have to file any types of proofs of claims or objections to the Bankruptcy Court to enforce her rights to continue to receive support.

In most cases, once a debtor files for bankruptcy then all creditors must stop all actions to collect their debts. This block is called an “automatic stay.” The automatic stay stops all foreclosures, garnishments, bank levies, and creditors from calling you at all hours of the night. The automatic stay does not apply to the enforcement of the collection of child support or alimony. These types of obligations have a super priority under the Bankruptcy Code.

3. My child support and alimony are deducted from my former husband’s paycheck. Will this garnishment stop if my husband files for bankruptcy?

Any child support or alimony garnishment order(s) that deducts current support from the husband’s wages are generally not affected by the bankruptcy filing. However, in many cases unscrupulous husbands will rack up thousands of dollars in child support arrears. The collection of child support arrears will be stayed in a bankruptcy filing. Any garnishment order(s) that collect past due support arguably are stayed in chapter 7 and certainly stayed in chapter 13. The husband will be able to propose a repayment plan to repay the child support arrears in a chapter 13 case.

4. I have filed a motion for an increase in child support. What happens to my motion if my ex‑husband files for bankruptcy?

In most cases the family court will not hear the support motion until the bankruptcy case is finished. Some judges will rule on the motion, and then hold that the automatic stay does not bar the family court from considering the motion. Other judges will require that the moving party to obtain stay relief. In simpler terms, stay relief means that the Bankruptcy Court issues an order that permits the moving spouse to continue her family court motion. To obtain stay relief, the moving spouse will have to obtain an order from the Bankruptcy Court that permits her to continue to pursue her motion requesting an increase in support. In the majority of cases a Bankruptcy Court routinely grants these types of motions.

5. My spouse has just filed for bankruptcy in the middle of our divorce case. What am I supposed to do now?

Divorce and bankruptcy really are intertwined in many cases. Living in New Jersey is extremely expensive. Paying for property taxes each year is similar to purchasing a new car. The stress of living in the “Garden State” is compounded once the spouses each have to maintain two separate households. Quite often, a divorce triggers a bankruptcy filing as well. In my opinion, the mixture of divorce case and a bankruptcy filing can really create a massive mess. There are no winners or loses in a divorce case. Therefore, if possible all parties really should try to achieve a compromise, and reach a fair property settlement agreement. In many cases a bankruptcy can help out both spouses if they both file jointly.

If one spouse files for bankruptcy, then the family court can still continue to hear and decide issues relating to establishing support. However, with regard to issues of equitable distribution, the family court will require stay relief, or a Bankruptcy Court order that permits the divorce case to continue. Basically, the Bankruptcy Court will not split up the family home, divide pensions, and apportion any stocks or mutual funds, until the Bankruptcy Court gives it permission to.

6. If my husband files for a bankruptcy can I still enforce the terms of the divorce judgment?

The Bankruptcy Code recently made non-support obligations incurred in connection with a divorce or separation non‑dischargeable in a bankruptcy.

7. If one spouse files for bankruptcy what happens to any joint credit card debts?

The distribution of credit card debts is a primary issue that arises in the majority of divorce cases. I always suggest that all credit card debts  should be paid off from the marital assets before any monies are distributed. It is always advisable to pay off all of the marital debt before the divorce is put through before the court. It is always important to emphasize that post‑judgment issues always arise. It is extremely important for a divorcing couple to tie up as many loose ends as possible.

If there is a sale of a marital home, then I always advise that the credit cards should be paid off at the closing. The closing attorney can send out checks to the credit card companies at the closing table. Moreover, in many cases, a good family court lawyer can assist their client to negotiate a settlement of the credit card debt(s). Many credit card companies will accept a 60% settlement of the debt if it is paid in one lump sum. However, before any credit card debt is settled, a person must always get a settlement letter from the credit card company or collection agency that verifies the terms of the settlement. Never trust a credit card company or a collection agency. Their chief goal is to collect as much money as possible. In many cases, credit card companies and collection agencies can be ethically challenged. Therefore, always get your settlement in writing before any checks are issued.

If one spouse files for bankruptcy, and if the other spouse does not file, then the credit card company will “go after” the spouse who did not file. When you sign up for a credit card, the spouses usually sign a contract that you need a microscope to read it with. The contract requires both parties to be jointly and severally liable. Basically, this means that if one spouse should die or files for bankruptcy, then the other spouse is liable for the entire credit card debt. The credit card companies do not care whether it is fair to collect the credit card debt from you or from your ex‑spouse, even though the charges were racked up by your ex‑spouse. The credit company is possessed with only one objective, and that is to collect money. They will destroy your credit, lien up your home, and garnish your paycheck to achieve their goals.

In any divorce case the distribution of credit card debts must be handled with an extreme attention to detail. One should never assume that their soon to be ex‑spouse will pay their credit card debt(s) that are delineated in their divorce judgment. Moreover, bankruptcy is a part of life in the United States. Even though the bankruptcy laws just recently became more strict, I predict that the amount of bankruptcy filings will still remain stable. Any property settlement agreement should have provisions in it that address what will happen to the apportionment of credit card debts if one spouse files for bankruptcy. I have seen countless of divorce cases, wherein one spouse files for bankruptcy, and tries to sandbag the other spouse with all of the credit card debt. Life is not fair! However, informed divorcing men and women can hedge their risks, and minimum these types of disasters that occur more often than not.

8. We are in the middle of a nasty divorce cae, and I was just served with foreclosure papers. What should I do now?

In many cases once a divorce is filed the family just falls apart. It is a sad reality that many families simply can’t pay for their mortgage payments once they split up. A spouse can file a chapter 13  to stop the foreclosure. A chapter 13 case will enable the family to propose a debt restructuring plan and a payment plan on the mortgage arrears. At the very least, a chapter 13  filing will buy the family some time, and enable them to find an apartment to live in.

Alternatively, a chapter 13 case could give a family some additional time to list their home on the real estate market, and then sell it. If a family loses their home at a sheriff’s sale, then the sheriff’s commissions, and the legal fees that are reimbursed to the bank’s lawyer are mind numbing. A family receives any excess equity in their home, only after the sheriff’s fees, the bank’s lawyers fees, and the mortgage are fully paid off. Therefore, it is always advisable for an economically distressed family to sell their home in a “distressed sale” rather than lose it at a sheriff sale.

9. If I file for a bankruptcy will this impact my spouse’s or my own I.R.A. accounts, cash value life insurance accounts, or jointly owned land?

In general, your filing bankruptcy will not affect your spouse’s property. In a chapter 7 Bankruptcy, the Trustee will be able to take property which you own if it is not exempt. The Trustee cannot take property of your spouse even if it is not exempt. Unfortunately, the answer is not so easy if you own property with someone else, including your spouse. Whether the property may take only your interest in the property, or all of the property depends on the nature of your ownership in it. If you own property jointly with anyone, including your spouse, the Trustee may take your share of the property. The Trustee cannot take the joint owner’s share. However, dividing the property between the joint owner and the Trustee may require that the property be sold.

You should be able to keep your SEP, IRA and 401K plans. In New Jersey, IRAs are exempt‑‑except for deposits made within six months before filing‑‑and EISA plans (which 401K and other retirement plans would ordinarily be) are also protected‑‑if the documents that created them contain properly drafted spendthrift protection. In New Jersey, the cash value in your life insurance is exempt up to a certain amount, if you name the proper beneficiaries and meet the other requirements to claim the exemption.

10. I was ordered to pay for my wife’s lawyer’s fees, can I wipe them out if I file for bankruptcy?

In many cases a divorce is simply a war of attrition. In many contested divorce cases the family court will award the wife counsel fees. Basically this means that the husband will have to pay for the wife’s lawyers fees. In many instances this could be a $10,000 or higher bill. People quite often feel very sick if they are ordered to pay for their spouse’s legal fees. This type of arena obviously explains why the security checks are so intensive at the local county courthouses.

It is not uncommon for a husband spouse to file for bankruptcy after a divorce is over. In many cases the husband will list the wife’s lawyers fees as a debt on his bankruptcy schedules. Consequently, the issue arises as to whether the lawyers’ fees are dischargeable in a bankruptcy. The key question is whether the counsel fee debt is declared as a support obligation or a property settlement claim.

The Bankruptcy Court recently declared obligations to pay spousal support and attorney fees, awarded as additional spousal support, as non‑dischargeable pursuant to 11 U.S.C. 523 (a)(5) of the federal Bankruptcy Act. Van Aken v. Van Aken, 2005 Fed. App. 0001 (6th Cir. 2005).

If an ex‑husband tries to discharge a counsel fee award, then it is imperative that the non‑debtor spouse file for an adversary proceeding with the Bankruptcy Court. Basically, the adversary proceeding will request that the Bankruptcy Court set this dispute down for a hearing. Thereafter, the Bankruptcy Court will decide whether the counsel fee award is a form of support and is non‑dischargeable. Alternatively, the Bankruptcy Court could decide that the counsel fee award is a form of equitable distribution and that it can be discharged. Moreover, the Bankruptcy Court could order that the payment terms of the counsel fee debt should be restructured. It is very important to emphasize that if a non‑debtor spouse ignores when their spouse files for bankruptcy, this could lead to a disastrous result. If there is no objection, then in all likelihood the debtor spouse will be successful in discharging a counsel fee obligation.

11. What will happen to my ex‑spouse’s credit report if I file for bankruptcy?

Each person has (or is supposed to have) a separate credit file for credit reporting purposes. Your debts, if yours alone, are not supposed to show in your ex‑spouse’s credit file. Similarly, your bankruptcy should not show in your ex‑spouse’s file if you have no joint debts. Even so, it pays to monitor your credit file, since credit reporting, like so much else in life, does not always follow the law.

12. What can I do to protect myself if my spouse files for a bankruptcy?

The more experience that I gain in the matrimonial world of divorce, the more I realize that life is not fair. In my one of my first divorce cases the parties agreed to equally split $40,000 worth of credit card bills. Unfortunately, my client did not want to ruin her credit, and she was forced to repay all of this debt. Her deadbeat husband did not pay a dime of these credit card debts even though the divorce judgment required him to pay one half of it. Credit card companies just want their money, and they don’t care who they collect it from.

It is always advisable to insert clauses into a property settlement agreement or a divorce judgment that limits the impact of a bankruptcy. Clauses can be put into a property settlement agreement that will give a spouse a right to reopen a case if a spouse has filed for a bankruptcy. Some sample clauses are as follows:

Sample Bankruptcy Proof Clause A

In the event of the declaration of bankruptcy by the Wife or Husband, then, in that event, said party shall continue to remain personally liable to the other for any and all expenses incurred by that other party in the connection with the defense of any suit instituted by a creditor or in connection with the payment of any monies to said creditor. It is the intention of the parties that any bankruptcy filed should be effective as against the creditor but shall not be intended to act to the financial detriment of the other spouse. The parties further agree that in the event a financial detriment to the other spouse is encountered as a result of the bankruptcy laws, then any provisions regarding equitable distribution and/or alimony shall be modified as to compensate the aggrieved party for the financial loss.

Sample Bankruptcy Proof Clause B

It is the intent of the parties that the obligations assumed by each in this Agreement, including any and all indemnifications, shall not be dischargeable in any future bankruptcy proceeding. The parties recognize that the support and equitable distribution provisions are interrelated; in the event one party is called upon to make payment on a debt, or fails to make payment to the other of an asset, as provided herein, such a circumstance would be considered a significant change in circumstance, warranting an application for a modification of the support provisions provided for herein, as well as a redistribution of assets and liabilities in order to effectuate the overall intent of ths Agreement. As a result of the interrelationship between the support and equitable distribution provisions of this agreement, it is the intent of the parties to consider the payment of debts and transfer of assets, including indemnifications, to be in the nature of alimony, support or maintenance for purpose of interpretation under the bankruptcy code. Moreover, the parties acknowledge that the benefit to the defaulting party of discharge of any obligations hereunder in any future bankruptcy proceeding will not outweigh the detrimental consequences to the no‑defaulting party. As a result, it is the intent of the parties that the obligations assumed hereunder shall not be discharge able in any future bankruptcy proceeding.

13. My husband filed for bankruptcy and he wiped off all of his credit card debts. The credit card companies are now suing me. What can I do?

Under New Jersey Law, the courts have continuing jurisdiction to review awards of alimony and child support and may increase or decrease such awards where parties’ circumstances have changed. The post-divorce bankruptcy of a spouse is a change in circumstances that may warrant a modification of a prior alimony award. More likely, it will be the non‑debtor spouse who makes the Lepis application because the bankruptcy has diminished the amount paid to the non‑debtor spouse as equitable distribution and because the discharge of the debtor spouse leaves more money available to distribute as alimony or child support. In simpler terms, the non‑debtor wife can file a motion with the family court, and request that the alimony, child support, and the terms of divorce settlement be reconsidered because of the bankruptcy. This type of application is commonly referred to as a Lepis application.

14. How has Bankruptcy Abuse and Consumer Protection Act of 2005 (2005 Act) affected the practice of family law?

There are several major changes that the new bankruptcy code hereinafter referred to as the BAPCPA has made on the practice of family law. All domestic support obligations are now classified “first” priority claims under section 507(a)(1) of the Bankruptcy Code. Second, among the first priority debts are those domestic support obligations that are assigned to a governmental unit. Basically, any child support that is owed to probation or to the local county board of social services is also given priority status.

15. How has the 2005 BAPCPA affected Chapter 13 practice?

Section 1307 (c) of the Bankruptcy Code was amended to make the failure to pay post‑petition support a grounds for dismissal of the bankruptcy case. Basically, if a debtor is not paying his child support then his Chapter 13 case can be dismissed. In addition, new section 1322(a)(4) of the Code provides that, although support owed is now a priority debt, it need not be paid in full if the debtor proposes a five‑year plan that commits all of the debtor’s disposable income and the debtor cannot pay the support obligation in full. This provision is intended to prevent large government support debts from making a mortgage cure and other chapter 13 remedies unavailable. Unpaid child support will of course not be discharged as is true under existing law.

New section 1325 (a)(8) of the Code makes the payment of post‑petition support one of the standards for a chapter 13 plan confirmation. Section 1328(a) of the Code likewise is amended to require a debtor, in order to obtain a discharge, to certify that all post‑petition support and all support requested to be paid by the plan has been paid. In summary the net result of all of these amendments is that it gives domestic support creditors much more power in chapter 13 cases, and the ability to reject the plan if they are not paid.

16. How has the 2005 BAPCPA affected the automatic stay provisions for a family law case?

The 2005 Act adds many new exceptions to the automatic stay provisions for proceedings dealing with child custody, visitation rights, domestic violence, and divorce. These exceptions are common sense corrections for proceedings that do not have an impact on a bankruptcy filing. Many people had probably assumed that they were not stayed, though in fact they usually were, as legal proceedings that could have been commenced prior to petition.

Basically, the new 2005 Act has given child support creditors the ability to ignore the automatic stay. Consequently, these new changes render the bankruptcy process subservient to the divorce case or child support hearing. The family law case now takes priority over the bankruptcy case. Therefore, the automatic stay will no longer automatically stop a divorce case or a child support hearing. It is important to emphasize that a support creditor still remains bound by a confirmed plan, at least as long as the current support is being paid and the debtor is performing under the plan.

17. How has the 2005 BAPCPA affected the issue of the dischargeability of child support and of alimony?

Section 523(a)(5) of the Code now makes all support obligations non‑dischargeable in all chapters. In addition, all property settlement debts that are owed to a spouse, former spouse, or a child of the debtor are non‑dischargable in a Chapter 7. Therefore, a non‑debtor spouse is no longer technically required to file an adversary complaint to block a debtor spouse from trying to bankrupt debt that is owed under a property settlement agreement.

The ability to pay and the balancing tests are eliminated from section 523(a)(15) of the Code. Section 523 (c) of the Code is amended to no longer require that dischargeability proceeding involving a property settlement be brought in the bankruptcy court. It is important to emphasize that these types of debts still remain dischargeable in a chapter 13 case. Therefore, I strongly believe that most future bankruptcy litigation over family law debts will be litigated in a chapter 13 case rather than a chapter 7 case.

18. How has the 2005 BAPBCA affected the issue of the exemption of certain assets in a bankruptcy case?

The new 2005 Act has also made some significant changes with regard to the treatment of exemptions in a bankruptcy case. Section 522(c)(1) of the Bankruptcy Code is amended to allow domestic support creditors to proceed against exempt property, including property exempted under state law. This change means that a debtor who files a bankruptcy case, and if he owes support debts then his exempt property as listed in his bankruptcy scheduled, can still be seized to pay for any of his child support debts.

Section 522(f) of the Code was also amended to prevent the avoidance of a judicial lien for domestic support obligations. The main effect of this change is to include any debts that are assigned or owned to probation or to a county board of social services agency among those protected from lien avoidance.

19. How has the 2005 BAPCPA affected the issue of preferences in a bankruptcy case?

Section 547 of the Code is amended to protect all bonafide payments on domestic support obligations from preference avoidance. The main effect of this amendment is that it adds protection for payments on child support to probation or to a county board of social services agency.

20. What are the new Trustee duties in a family law case as required by the new 2005 BAPCPA?

The bankruptcy trustee must now give notice to all holders of domestic support obligations of the services provided by the state child support enforcement agency and the right to use such agency’s services to collect child support during and after the bankruptcy case. The trustee must also send notice of the claim to the state child support enforcement agency. This notice can be combined with the notice to the hold of the support claim.

Another notice must also be sent to the hold of a support claim and the state child support enforcement agency when a discharge is granted. The notice must contain the last known address of the debtor and the debtor’s employer. It must also contain the name of each creditor holding a claim that was not discharged under section 523(a)(2), (4), or (14A) of the code, or that was reaffirmed under section 524 (c) of the Code.