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The Intersection of Family and Bankruptcy Law
The devastating effects of divorce often intersect with bankruptcy law. Couples who reside together share certain costs, like housing, food, bills, and more. When people split and go their separate ways, such expenses are not shared, leading to an increase cost of living expenses. This increase intensifies financial stress, wherein the parties have increased living expenses in addition to legal fees and fees associated with the divorce. The fees associated with the divorce tend to be psychological costs, increased need for daycare, professional fees like accounts for forensic accounting, and adjuster costs for evaluating home value. Often, these added fees intensify financial stress that compels a person to find an avenue to handle increasing debt.
When a person engaged in a divorce turns to bankruptcy protection, there are numerous exceptions under the Bankruptcy Code that a bankrupt debtor can utilize for non-family related debts. That is to say, debt relted to certain family law expenses do not enjoy bankruptcy protection.
This article discusses the following issues regarding the intersection between divorce and bankruptcy:
- Collaboration between family and bankruptcy courts;
- Support and alimony;
- Increased child support subsequent to bankruptcy; and
- Joint debt.
Filing for Bankruptcy During a Divorce
Family courts and bankruptcy courts often work simultaneously so that the distribution of assets in family court will require permission in bankruptcy court. Often, the non-bankrupt spouse will file a motion in bankruptcy court for permission for the family court to distribute the marital assets. More specifically, regarding issues relating to establishing support, the family court will still hear evidence and render decisions. Regarding equitable distribution, the family court will require stay relief permiting the divorce case to continue. This means that the family court will divide the family home, pensions, and apportion any stocks or mutual funds only if it receives permission from the Bankruptcy Court.
Enforcement of Judgment
After a family court issues a judgment and one spouse is in bankruptcy, BAPCPA, in section 523(a)(5) of the Bankruptcy Code, specifically states that all support obligations are non-dischargeable in bankruptcy, meaning that the debt cannot be eliminated. In addition, all property settlement debts that are owed to a spouse, former spouse, or a child of the debtor are non-dischargeable in a Chapter 7 bankruptcy. Operationally, a non-debtor spouse is no longer required to file an adversary complaint to block a debtor spouse from trying to bankrupt debt that is owed under a property settlement agreement.
Support and Alimony
A spouse who is receiving support or alimony is excepted from the automatic stay. Under section 362 of the Bankruptcy Code, upon a debtor’s filing of a bankruptcy petition, creditors holding pre-petition claims are stayed from any collection actions against the debtor. Spousal maintenance is excepted from the stay, meaning that any monies owed for spousal maintenance are due and can be paid as usual.
Motion for Increased Child Support
Generally, a family court will not hear the support motion until the completion of the bankruptcy case. Some courts may hold a motion hearing and rule on the increase by claiming that the automatic stay does not prevent a family court from considering the motion. Other courts will require the moving party to obtain stay relief by filing a motion with the bankruptcy court. In other words, the Bankruptcy Court will issue an order that permits the moving spouse to continue the family court motion requesting an increase in support, which the bankruptcy court will support. Bankruptcy Courts routinely grants these types of motions.
Often, upon a judgment of divorce, a family court will order both spouses to pay half or other proportions of joint marital debt. This means that the divorce decree compels each side to pay back debt. If, subsequent to that divorce decree, one spouse files for bankruptcy, then that spouse removed him or herself from any obligations to the creditor. Because the debt was joint debt, the non-bankrupt spouse would then be obligated to the creditor for the entire amount. For instance, if the divorce decree requires the spouses to pay back credit card debt on a 50/50 split and one spouse files for bankruptcy, the credit card company cannot collect from the bankrupt spouse. This leaves the non-bankrupt spouse responsible for the entire debt. In such an instance, the non-bankrupt spouse can get reimbursed from the bankrupt spouse through the family court because the bankrupt spouse violated the divorce decree.
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