Source: http://fathersunite.org/ChildSupport/Bankruptcy_meets_divorce_support.html
Timestamp: 2019-04-26 11:45:12+00:00

Document:
by Gary A. Starre, Esq.
5. PRIORITY OF SUPPORT DEBT WHEN THE BANKRUPTCY ESTATE IS DISTRIBUTED.
Generally, the filing of a bankruptcy is not supposed to have any impact on child support, spousal support and family support. Of course, as is rampant in our profession, there are exceptions.
On the .i.filing of a petition in bankruptcy;, an .i.estate ;is created (11 USC §541) , and a "trustee" is then appointed to act as its representative and "administer" the estate. Administration of the estate means the trustee marshals those assets deemed to have sufficient value for sale to benefit creditors, and which are not "exempt" assets; i.e. exempt from being marshaled. This estate encompasses all of the debtor's equitable and legal interests in all of the debtor's separate property, plus all of the .i.debtor's community property;, including in a one-spouse petition any .i.community interest of the non-filing spouse;. The .i.community property ;of the spouses may now be the center of controversy in two separate and distinct actions--the bankruptcy and dissolution proceedings and in two separate and distinct forums--the bankruptcy and state court.
The issue addressed in this article is what funds and property are available to satisfy support obligations, and what is the effect of the automatic stay, the automatic restraining order that goes into effect at the moment a bankruptcy is filed pursuant to 11 USC §362.
Practitioners in Los Angeles are generally faced with bankruptcies filed under Chapters 7, 11 or 13. (Other chapters exist, including Chapter 12 reorganization for farmers, but its use in Los Angeles is extremely rare and not discussed here.) In Chapter 7 property of the estate consists of all the property (including accounts receivable) as of the date of the filing - but not post petition wages. (Post petition earnings from interest, rents and profits and other sources that flow from pre petition assets are property of the estate.) In Chapters 11 and 13, post bankruptcy filing income is property of the estate because these chapters deal with repayment style bankruptcies.
When any person or entity files bankruptcy, there is created an automatic stay -- an automatic restraining order that stops virtually all legal action pursuant to 11 USC §362(a).
(B) of the collection of alimony, maintenance or support from property that is not property of the estate."
It is therefore of paramount importance to first determine if relief from automatic stay is even needed. Note the above-quoted exception only applies to collection from "property that is not property of the estate."
Faced with a spouse's Chapter 7, the non filing spouse can immediately go after the debtor spouse's post petition income, because post petition income is not property of the bankruptcy estate. No motion for relief from stay is required. However, if the non-filing spouse needs to go after the debtor's property, which is property of the estate, then a motion for relief from stay is required.
Faced with a spouse's Chapter 11 or 13 filing, in which the debtor's property AND income is property of the estate, a motion for relief from the stay is required.
Heavy sanctions can be awarded for a willful violation of the stay. Acts in violation of the stay, even innocent violations done without notice of the bankruptcy are void, not voidable.
Wage assignments must stop when a Chapter 11 or 13 is filed, and if arrearages are being collected, when any Chapter is filed, since it is deemed to be collection of a pre-petition debt, regardless of the dischargeability issues. After the District Attorney obtained a wage assignment order, the debtor filed Chapter 13. The DA continued to enforce the wage assignment order in violation of the stay, after demand for release was made by the debtor. The Bankruptcy Court found that the DA had willfully violated the automatic stay, although the DA was not ordered to return the money since the plan provided for 100% payment of arrearage (even though this usually not allowed in California; see Pacana) and the debt would have been nondischargeable after completion of the plan anyway. However, the Court did order the DA to cease enforcement of the wage assignment order and threatened sanctions if the collection continued. In re Price 179 B.R. 209 (Bankr. ED Cal. 1995).
The automatic stay has been held not to apply to contempt proceedings, when the contempt is for failure to pay support In re Berg, 186 BR 479 (9th Circ. BAP 1995).
"(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate; and (2) the stay of any other act under subsection (a) of this section continues until the earliest of (A) the time the case is closed; (B) the time the case is dismissed; or (C) if the case is a case under Chapter 7 of this title concerning an individual...,the time a discharge is granted or denied."
Once the case is closed, property that was not administered by the trustee in the bankruptcy reverts to the debtor in the same form as it was before. (Property that was administered means it was sold by the trustee and distributed to creditors.) Upon closing the Section 362 stay dissolves. While the debtor is thereafter discharged from ordinary debts, debts arising out of support obligations are automatically nondischargeable pursuant to 11 USC §523(a)(5).
"It would result in great injustice to require children to await a bankruptcy court's confirmation of a debtor's chapter 13 plan before permitting them to enforce their state court-determined right to collect past due support payments. The bankruptcy code may not be used to deprive dependents, even if only temporarily, of the necessities of life.
.i..i. Spousal and child support obligations;, whether imposed by Court order or by marital settlement agreements are .i.non-dischargeable ;under .i.11 U.S.C. §523(a)(5);, but the .i.non-filing spouse ;should consider promptly filing his or her.i. proof of claim as soon as notified by the bankruptcy court;.
If there is any ambiguity as to whether a debt is a property debt or support debt, the either spouse can file a complaint to determine whether a debt is really support or a property debt masquerading as one or the other, and therefore affect dischargeability. For example, even though a debtor may have agreed in a .i.marital settlement agreement ;to a .i.support decree;/obligation, the debtor may still request the bankruptcy court to make a new determination that the amount is not actually needed as support and was in fact a .i.disguised property division;. The debtor can therefore seek an .i.order to allow discharge ;of all or a part of the amount, even if labeled as support by the state court judgment or marital settlement agreement. This gives the debtor a second bite at the apple, as far as determining support, since state court labels are not considered binding on the bankruptcy court. Thus, .i.marital settlement agreements ;with support provisions should be drafted carefully detailing the basis for any amount specified as support.
"The final determination of what portions of the [family law] judgment constitute nondischargeable alimony, support or maintenance is a question of federal law. Gionis v. Wayne (In re Gionis) 170 B.R. 675, 681 (9th Circ. BAP 1994)(citing In re Shaver, 736 F2d at 1317), see also In re Stout 691 F.2d at 861 (citing H.R. Rep. No. 95-595, at 364, reprinted in 1978 USCCAN 5787, 6320). Therefore, the labels used by the state court in determining the Judgment were not binding on the bankruptcy court. An independent review of the Judgment and factual inquiry into the true nature of any support was certainly within the power and discretion of the bankruptcy court. In re Gionis 170 B.R. at 681, Sweck v. Sweck 174 B.R. 532, 534 (Bankr. D. R.I. 1994).
"(5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with State or territorial law by a governmental unit, or property settlement agreement."
An important exception to the general rule of nondischargeability is that support arrearage assigned by the non-debtor spouse to a government welfare agency as a condition for public assistance are dischargeable. In the recent case of In re Cervantes, 1999 Daily Journal D.A.R. 993, (9th Circ. BAP 12/31/98), a Chapter 13 debtor filed a complaint against Santa Cruz County, to whom his wife had assigned her past due pre-petition support arrearage in exchange for receiving public assistance. The Court held that the debtor could discharge support arrears that had been assigned to a government agency.
1. The label given to payments in the state court.
2. The context of the disputed provision in a decree (e.g. whether there is a separate support clause in addition to the disputed clause).
3. Whether the obligation terminates on death or remarriage.
5. Whether the payment is made with the intent of balancing disparate incomes or disparate division of spousal property.
6. Whether the payment is lump sum or periodic.
7. Whether there are children and the effect of the payment on them.
8. The relative incomes and earning power at the time of the settlement, judgment and time of bankruptcy.
9. The adequacy of support in the absence of assumption of debt by the debtor.
11. Whether a property award is really made in lieu of a support award.
In re Ingram 5 B.R. 232 (Bankr. ND Ga 1980); In re Petoske 16 B.R. 412 (Bankr. ED NY 1982); In re Anderson 21 B.R. 335 (Bankr. SD 1982).
However, even that which appears to be obvious disguised support is not always so. In re Sternberg (85 F3d 1400, (9th Circ. 1996), two parties agreed their MSA that Husband was to pay $2 million by a given date from community assets. If not paid, then the non filing wife would get $12,000 until the $2 million was paid, regardless of remarriage, and would be nontaxable. Although this certainly appeared to be a disguised property obligation and dischargeable when Husband filed bankruptcy, the Ninth Circuit held otherwise, that this was nondischargeable support because of the Wife's relative need of the Wife and ability of the Husband!
In another MSA, two parties agreed to a $325,000 community property payment, payable part in a lump sum and the balance in a lump sum. The parties agreed that spousal support was waived when the first payment was made. After making payments for a period of time, the debtor stopped and filed Chapter 7. The non filing spouse filed a dischargeability complaint alleging that the true intent of the payments was nondischargeable spousal support to be paid for a given amount of time. The Bankruptcy Court agreed, and the decision was upheld on appeal. In re Kritt 190 B.R. 382 (9th Cir. BAP 1995).
Accrued arrearage, even when the reason terminates, such as a child reaching the age of majority, or a spouse remarrying, remains nondischargeable. In re Bedingfield 42 B.R. 641 (Bankr. SD Ga 1983).
Agreements for the waiver of discharge are generally unenforceable. although the Bankruptcy Court would undertake its own inquiry into whether the obligation falls within an enumerated exception to discharge, such as Section 523(a)(5). Berr v. FDIC 172 B.R. 299 (9th Circ. 1997).
Even though support is nondischargeable, a proof of claim should be filed whenever the bankruptcy court sends out a notice to do so. Otherwise, the claimant cannot receive a payout from the bankruptcy estate. Ever since 1994, a support claim is treated an unsecured priority debt. 11 USC §507(a)(7). That means that on distribution of a debtor spouse's assets, support arrears will be paid in full before general unsecured debts, although still behind bankruptcy administrative expenses, taxes, certain recent unpaid wages and a few other priorities. However, the non-debtor spouse must file a proof of claim. The filing of a proof of claim does not preclude the spouse from availing herself of other remedies discussed herein, including going after assets outside the estate, and seeking relief from stay to get at estate assets.
Proof of Claim must be filed by the non-debtor spouse if there are any assets that are going to be administered. In a Chapter 7, the date is 90 days after the first meeting of creditors (Bankruptcy Rule 3002), unless the notice states that the case is a no-asset case, in which case a deadline date to file will be set. In a Chapter 13, the rule is also 90 days after the first date set for the first meeting of creditors. In a Chapter 11, the amount listed by the debtor will govern unless the creditor files a Proof of Claim, in which case that will take precedence. In Chapter 11, there is no set time, but will be governed by a "bar date" that is set by the Court and notice given to creditors.
If a spouse discovers that he or she has been omitted from the list of creditors filed by the debtor, that spouse should immediately file a proof of claim and request for special notice as soon as possible, so that notice of bankruptcy events will be received. In a no-asset Chapter 7 case (which merely means that there were no non-exempt assets worth administering, not that there were no assets), the discharge is to all debts that could have been discharged, not merely those that were listed. In re Beezley 994 F.2d 1433; (9th Circ. 1992). Thus, the tactic of ignoring a bankruptcy merely because formal notice was not received is not a wise one.
“...was not filed for the purpose of a just liquidation by composition with creditors but to defeat the wife from a right of possession in and to the real estate which was to be awarded to her under the divorce proceedings. This violates the purpose and intent of the statute . . . and, as said by the Supreme Court of the United States, under that situation, the proceedings will be halted at the outset. Id. at 833 citing In re Brown, 21 F. Supp. 935, 939 (S.D. Iowa 1938)."
In In re Zick, 931 F.2d 1124, (6th Cir. 1991), the 6th Circuit held that a debtor's Chapter 7 Bankruptcy was properly dismissed where the debtor had failed to meet the implicit "good faith" requirements of the Bankruptcy Code. Relying on numerous Chapter 7 cases, the 6th Circuit said it was "persuaded that lack of good faith as a basis for dismissal under Section 707(a)..."
The consideration of the bad faith argument requires an exercise of the discretion of the Court, after consideration of the totality of the circumstances. In re Stolrow's, Inc., 84 Bankr. 167 (9th Cir. B.A.P. 1988); In re Del Rio Development, Inc., 35 Bankr. 127 (9th Cir. B.A.P. 1983). The concept, good faith, is not opened to serious debate. In re Kragness, 63 B.R. 459, 465  (Bkrtcy. D.Ore. 1986).
While not defined in the Bankruptcy Code, "good faith" has been repeatedly held to require "at the very least a showing of honest intention." In re Hammonds, 139 B.R. 535, 541 (Bkrtcy. D.Colo. 1992). In re Johnson, 708 F.2d 865, 868 (2d Cir. 1983). To determine whether good faith exists, the Court must investigate the facts and circumstances in each case for any abuses of the provisions, purpose or spirit of the Bankruptcy Code and determine whether the debtor honestly requires the liberal protection of the Bankruptcy Code. In re Hammonds, supra. See also, In re Vlahakis, 11 B.R. 751, 753 (Bkrtcy. MD. Ga 1981).
"While the requirement of good faith filing is not codified by the Bankruptcy Code, case law has developed an intense fact-based inquiry in determining good faith (ftnt 3: 931 F.2d 1124, 1128 (6th Circ. 1991) where factors for determining good faith include: (1) the debtor's manipulations which reduced the creditors in this case to one; (2) debtor's failure to make significant lifestyle adjustments or efforts to repay; (3) the fact that the petition was filed clearly in response to [the creditor's] obtaining a mediation award; (4) the unfairness of the debtor's use of Chapter 7 under the facts of this case. ..172 B.R. 37,39 (Bankr. E.D. Ark 1994) which outlined additional criteria, including whether: (1) the debtor has sufficient resources to pay his debts, (2) the debtor is paying debts of insiders, (3) the schedules inflate expenses to disguise financial well being, (4) the debtor transferred assets, (5) the debtor is overutilizing the protections of the Code to the unconscionable detriment of creditors, (6) the debtor employed a deliberate and persistent pattern of evading a single major creditor, (7) the debtor failed to make candid and full disclosure, (8) the debtor's debts are modest in relation to his assets and income, (9) there are multiple bankruptcy filings or other procedural 'gymnastics'".
The Ninth Circuit dramatically changed the way liens are recognized in bankruptcy in the case of In re Jones (9th Cir. 1997) 106 F.3d 923, (2/11/97). Until February 1997, both California state law and bankruptcy law provided that judgment liens were paid off in priority, and that surplus equity over and above a homestead went to pay off judgment liens. Bankruptcy has always had a provision, that allowed liens that interfered with the homestead exemption to be removed, measuring the equity as of the bankruptcy filing date. However, in Jones, the 9th Circuit changed that -- only for bankruptcy cases, not state cases, by holding that the test whether a judgment lien holder will be paid depends the equity in the property on the date the abstract was recorded, regardless of the equity when the bankruptcy is filed! Note that this could cause a later lien to be paid and an earlier one to be voided, depending on the equity on the recording dates. Creditors who have obtained judgments need to be careful to re-record their abstracts of judgment if they believe that the property against which they have recorded has increased in equity value. Debtors and homeowners who might someday become debtors should immediately record a declared homestead for this added protection.
In bankruptcy, a debtor frequently has the power to strip judicial liens in various circumstances (Sections 506 and 522). A judicial lien is created by a judgment, even when the judgment is by stipulation. However, a lien created in divorce decree cannot be stripped as judicial lien because it is not deemed to be a lien that obligated the debtor before the agreement that gave the property to the debtor. In re Foss 200 BR 660 (9/13/96).
However, there is an exception to the rule, if the non filing spouse is not personally obligated, then the fees are dischargeable. In the case of Eisen v. Linn (In re Linn) 38 B.R. 762 (9th Circ. BAP 1984), the husband had been ordered to pay a court appointed psychiatrist and the attorney ad litem for the child. The child and the mother were not personally liable. The husband filed a Chapter 7 bankruptcy, and the attorney filed a nondischargeability action claiming that the fees ordered had been in the nature of support. Held, dischargeable, because the former spouse received no benefit from the payment, unlike the situation in which the payment of fees by the debtor husband would have reduced the wife's obligation to her attorney. In a similar vein, an attorney fee award to a judge pro tem, in which the non-debtor spouse was not obligated for the debtor's part, was dischargeable. In re Hutchins 113 B.R. 1 (Bankr. C.D. Cal. 1990).
The attorney fees incurred do not have to even be related to support. In the case of Gionis v. Wayne (In re Gionis) 170 B.R. 675, 681 (9th Circ. BAP 1994), the state dissolution court declined to award spousal support to either spouse, but did award attorney fees to the non-debtor spouse following a battle concerning division of property and custody. The state court stated that it was basing its award on the (non-debtor) wife's need for funds to litigate the case and the husband debtor's conduct in the custody battle. Spousal support was not awarded. The debtor attempted to discharge the attorney fee award in Chapter 7. Held, nondischargeable, because the attorney fee award was still in the nature of support. Fees incurred in a contempt proceeding were similarly held nondischargeable. Sinewitz v. Sinewitz 166 B.R. 786 (Bankr. D. Mass. 1994).
The Gionis case appears to have implicitly overruled an earlier decision, Gard v. Gibson (In re Gibson) 103 B.R. 218 (9th Circ. BAP 1989), which held that where the fees were used solely to effectuate a division of community property, the fee award was dischargeable.
Note however that the state court in Gionis still used a "relative need and ability" test in awarding the fees, as is the usual case, which appears to have helped the Bankruptcy Court decide the fee award to be nondischargeable. In a case where there was no need and ability basis considered for the underlying award, the bankruptcy court did declare the debt dischargeable. In re Gibson 103 B.R. 218 (9th Circ. 1989).
What if the non-debtor spouse dies after the debtor files bankruptcy? The case of Leppaluoto v. Combs (In re Combs) 101 B.R. 609 (9th Circ. 1989) held that the death of the non-debtor spouse abused an assignment by operation of law of arrearage support payments to her estate, making the actual support arrearage now dischargeable. However, the attorney fee award rights in bankruptcy are established by the date of the bankruptcy filing, and thus were nondischargeable.
As a general rule, the legal fees incurred in the nondischargeability action filed by an attorney to protect his fees are themselves nondischargeable. This logically follows because the non-debtor spouse has no obligation for those fees. However, at least one court, in Holloway v. Kelley (In re Kelley) 151 B.R. 790 (Bankr. S.D. Tex. 1992) held that where the marital settlement agreement provided for the payment of attorney fees to enforce the terms of the agreement, the attorney fees incurred in the nondischargeability case were themselves nondischargeable, citing Jordan v. Southeast National Bank (In re Jordan) 927 F.2d 221, 226, (5th Circ. 1991).
Pursuant to Bankruptcy Rule 4007(c)., the complaint for nondischargeability must be commenced within 60 days after the first date set for the Meeting of Creditors (the 341a hearing).
Bankruptcy remains an area where family practitioners would be wise to consult with experienced bankruptcy attorneys when faced with a bankruptcy filing. Time deadlines are generally very short, and support as well as property rights are at risk immediately.

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