Divorce and bankruptcy are very difficult proceedings on their own. When a soon to be ex-spouse unexpectedly files bankruptcy in the middle of a messy divorce, “what next?” is the question on everyone’s lips. Even the most seasoned divorce attorneys question what they can do when a suggestion of bankruptcy pops up in their service inbox. Civil practitioners who are not regularly involved with bankruptcy actions fear that a bankruptcy hurts the progress made so far for their client, and the bankruptcy cancels all the hearings scheduled. Favorable judgments being voided by a bankruptcy judge and sanctions from failure to respect the bankruptcy stay should give practitioners pause. However, before advising the client that the bankruptcy means game over, the client (and divorce counsel) should consult an experienced bankruptcy attorney to assist with the new game plan for the case. This article is an elementary primer on how a bankruptcy filing and the automatic stay can affect the divorce relief sought and procedures to get that relief.
Analysis When Divorce and Bankruptcy Collide
When divorce and bankruptcy collide, it is essential to examine the following issues to evaluate how the legal strategy may need to change:
- Whether the bankruptcy’s automatic stay requires court permission before divorce proceedings and scheduled hearings can move forward;
- Whether the state court and bankruptcy court have concurrent, jurisdiction, or whether the bankruptcy code dictates that the bankruptcy court’s jurisdiction supersedes that of the state court;
- Whether marital assets are property of the estate; and
- Dischargeability of debts and divorce court awards.
The Automatic Stay
What is the automatic stay? The automatic stay is a federal injunction that prevents debt collection actions and proceedings against the debtor and property of the estate from moving forward that is triggered the moment the bankruptcy case is filed.
There is a misconception that a bankruptcy filing means everything must stop. Under the current bankruptcy code, the automatic stay does not prevent the following proceedings from moving forward when it involves the below determinations:
- Establish (or modify) alimony or child support;
- Child custody or visitation;
- Divorce; and
- Domestic violence.
Despite the actions not being stayed, be careful when going forward with the collection or withholding of property of the estate. It is best to consult with a bankruptcy attorney before the proceeding moves to the collection phase of an award. Stay relief may be required for the collection phase or collection may require a proof of claim to be filed in the bankruptcy case.
Jurisdiction & Property of the Estate
Bankruptcy court is a federal court, and divorce is in state court. This does not make bankruptcy court an appellate court for divorce court matters. Debtors filing bankruptcy to get a different or better result than the determination made by the divorce judge will find very quickly that bankruptcy judges believe that divorce or family issues are best handled divorce court judges. The bankruptcy judges often modify the stay to allow the parties to return to divorce court to litigate pending issues or the debtor is stuck with the unfavorable decisions rendered by the divorce court judge. This search for a better result on the same issue in different courts is referred to as Forum Shopping, and the bankruptcy judges can spot a forum shopper when they see one.
The bankruptcy court has jurisdiction over bankruptcy matters and issues that affect the debtor and property of the estate, but does not decide purely state court disputes unless there is consent by both sides and it benefits the bankruptcy process.
The property of the estate is an important bankruptcy term and this property encompasses all the assets of the debtor on the date of the filing and, depending on the chapter filed, the post-filing income of the debtor. The assets include all tangible and intangible property (and claims for payment) where the debtor has a legal or equitable interest. This is meant to very broad and inclusive.
Dischargeability
The bankruptcy discharge is a court order releases the debtor for legal liability for debts listed in the bankruptcy case filing. Certain debts are not dischargeable meaning the bankruptcy will not affect the debtor’s obligation to pay the debts. Bankruptcy Code section 523(a) provides a full list, but below are the debts excepted from discharge in bankruptcy that are most often at issue in a divorce proceeding:
- Debts that arise after the filing of the bankruptcy (“post-petition debts”);
- Debts that are not listed and noticed of the bankruptcy proceedings;
- Domestic Support Obligations, such as alimony and child support;
- Equitable Distribution Awards (unless the debtor has filed a chapter 13); and
- Student Loans.
As always, it is best to contact a bankruptcy specialist to consult on whether a stay relief motion and the filing of a proof of claim benefits your client, and how the divorce case strategy may need to evolve in light of the new issues and procedures created by the bankruptcy filing.
The below contact form can be used for questions or more information.
Kelly Roberts
Roberts Law, PLLC
Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction or the jurisdiction applicable to your issue/matter. No information contained in this post should be construed as legal advice from Roberts Law, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
