Source: https://insolvencyintel.abi.org/whats-new/divorce-issues-in-bankruptcy-often-make-handling-divorce-matters-advantageous
Timestamp: 2019-04-20 12:59:20+00:00

Document:
Although numerous issues intertwining bankruptcy affect divorce claims, some divergent bankruptcy matters need to be brought to the attention of most domestic attorneys representing the party to whom obligations are owed: (1) your client’s divorce-related debt will not be discharged and you do not need file an adversary proceeding to preserve the debt; (2) do not over-litigate your client’s interest to a bankruptcy judge as the same will not be embraced; (3) many times you will not need stay relief to pursue divorce matters; (4) file a proof of claim; (5) be less concerned about a preference action against your domestic support obligation (DSO) client; and (6) your client’s rights against homestead or other exempt assets improve in bankruptcy, particularly when the debtor resides in a debtor-friendly state such as Florida.
This article will be delivered in two parts. The first part will review the considerations given to the party owed alimony or child support. The second part will focus on the unique circumstance from which a creditor owed alimony or child support may have amplified rights of protection and collection should the nonpaying former spouse file for bankruptcy.
Uniquely, domestic matters can be heard after a bankruptcy filing without a need to obtain relief from the automatic stay.10The rule is simple: matrimonial obligations in the “nature of support” do not need stay relief.11 So long as the property subjected to the DSO issues is not property of the estate, the DSO creditor may seek action in the matrimonial court without stay relief.12 In addition, bankruptcy courts will often be lenient to the domestic creditor. Occasionally, a domestic creditor can be overly aggressive and unknowingly violate the stay, but such matters in the Eleventh Circuit will not usually deliver sanctions.13 In short, bankruptcy courts seek to loosen their grip on disputes between the debtor and a domestic creditor — often delivering the matter to the “other” court.
There are two provisions in the Bankruptcy Code affecting the discharge of the debtor: exception to discharge and denial of discharge. The former excepts the discharge as to a particular creditor’s claim against the debtor. In such a circumstance, all other claims would be discharged. In effect, the excepted creditor’s abilities to collect improve as the debtor’s ability to pay improves. Bankruptcy will have relieved all responsibilities of the debtor to pay discharged creditors, thereby allowing the debtor to focus on the excepted debts. Among the most obvious of such excepted debts are Internal Revenue Service debts,14 DUI debts15 or criminal activities that might have restitution awards associated with the adjudication of guilt.16Unknown to many domestic lawyers, an award for a domestic debt is also excepted17 — and that DSO excepted debt exists without the necessity of filing a dischargeability action.
Alternatively, a denial of discharge annuls the discharge as to all creditors. The denial of discharge defeats the bankruptcy’s purpose. If a discharge is denied under 11 U.S.C. § 727, the debtor effectively loses all benefits and none of the debt is discharged. Additionally, the debtor may lose numerous assets to the chapter 7 trustee’s administration. When the latter circumstances arise, it is truly a lose/lose circumstance to the debtor. Any creditor seeking such recourse must file an adversary.
Sometimes, the bitterness between the spouses cannot be exaggerated. In fact, the former spouse of a debtor tends to be one of the most reliable and useful tools for a chapter 7 trustee’s discovery of hidden assets. But upon reviewing the above-recited freely granted exception to discharge to former spouses/parents, together with the first priority for payment in a bankruptcy, as well as the exemption-busting provision under 11 U.S.C. § 522(c)(1), DSO creditors must think about whether being overly aggressive is best for the client.
There have been cases where a former spouse, who already has had his or her debt excepted from discharge as stated above,18 wants more. He or she wants denial of the discharge. Apparently exception to discharge is not enough. Before a former spouse files an adversary seeking denial of the entire discharge — for any of the allotted reasons19 — domestic attorneys and their clients should understand one thing: Bankruptcy courts might not be receptive to handling domestic matters.20 Bankruptcy courts already understand that the DSO creditor has the best of all worlds (allowing the debtor to be discharged of every other debt, which enables the debtor to more ably pay the DSO creditor). Bankruptcy courts, therefore, might not receptive to a denial of discharge action being filed by the already blessed nondischarged DSO creditor.
Congress allowed DSO creditors to have their debt excepted from discharge without the need for filing an adversary proceeding. Congress has also allowed the DSO creditor to seek enforcement outside of bankruptcy without the need for stay relief. Congress further gave DSO creditors a first priority in payment from any recoveries made in the estate. Congress virtually emasculated the bankruptcy discharge in regard to the DSO creditor. In the second portion, this article will look into how Congress also made the DSO creditor virtually immune from trustee attack and provided heightened collection rights. In fact, the DSO creditor’s rights to enforce pre-petition DSO debt may include the liquidation of the debtor’s exempt assets — something even the federal government or the IRS cannot do.
The first portion of this article reviewed how a DSO creditor need not shudder if he or she discovers the DSO debtor has filed a bankruptcy. If a bankruptcy is filed, the DSO creditor knows the debt will not be discharged, the nondischargeable portion of the debt does not require a costly adjudication by adversary, and if the estate administers assets for the creditors, the DSO creditor will be paid as the first priority. This portion of the article focuses on how Congress has fortified the protections and collections for DSO creditors.
“Preferences are integrally a part of a collective proceeding (bankruptcy, composition, receivership, and such proceedings that marshal the assets of a debtor)….”24 “By definition, a preference involves a transfer on account of an antecedent debt, and there is no question as to the reinstatement of the debt if there is a recovery by the trustee or debtor.”25 To this definition numerous exceptions exist, including immunity to the DSO creditor who receives payment within 90 days of the petition.26The exception provided to the DSO creditor is so unambiguously written that a review by this author cannot find one published case in which a trustee and DSO creditor fought over such a DSO payment being preferential.
Inside of bankruptcy, this may not be true. DSO creditors may have greater rights — and may even be able to liquidate the Florida homestead!
Hence, when the debtor files bankruptcy, what must the DSO creditor do, if anything? First, file a proof of claim as DSO creditors are paid as first priority. Second, a prudent thing is to prohibit there being an adjudication that the otherwise-exempt property is exempt. In bankruptcy, absent timely objection to the exemption within 30 days of the date set for the first meeting of creditors (“341 meeting”), the property is deemed exempt.37 Even though the above-described language of § 522(c) of the Bankruptcy Code appears to assert that the exemption will not permit post-bankruptcy collection against the otherwise-exempt property, it may be advisable to get a comfort order from the bankruptcy court stating that under § 522(c)(1), the otherwise-exempt property is not deemed to be exempt as to the DSO creditor as provided by the Bankruptcy Code.38 Thereafter, the creditor could take that bankruptcy court order to the state court when executing against homestead or other exempt properties, from which the state court judges or sheriffs will better understand why DSO creditors are executing against properties that would otherwise be deemed prima facie exempt from creditor attack.
The better practice would be to have the liquidation or administration in the bankruptcy court. The Quezada court hints that it may not deny a DSO creditor’s motion that parallels the denied motion filed by the Quezada trustee.39 The denial in Quezadaarose because the movant was not the DSO creditor or lacked standing. Had a DSO creditor come to the Quezada bankruptcy court requesting liquidation of the debtor’s homestead, the Quezada motion might have been granted by the court. And if that motion had been granted, a more immediate liquidation and payment would possibly arise. Bankruptcy courts, unlike state courts, allow rapid liquidation and transfer of cash to the DSO creditor that is often not often provided by state court remedies. For this reason, DSO creditors owed pre-petition debt should contact bankruptcy professionals to review such an issue.
4. 11 U.S.C. §§ 523(a)(5) and 1328(a)(2).
(1) a debt of a kind specified in paragraph (1) or (5) of section 523(a) (in which case, notwithstanding any provision of applicable nonbankruptcy law to the contrary, such property shall be liable for a debt of a kind specified in such paragraph)….
9. “Section 523(a)(5) of the Bankruptcy Code can and should be applied to debts in the nature of support payable to third parties if, and only if, at the time of the debtor's bankruptcy, the former spouse is also obligated to the third party. In that instance, discharge of the debt would leave the former spouse liable and the exception would properly be applied to protect her. By contrast, where, as in this proceeding, any obligation by the Former Spouse has been extinguished, neither sound statutory construction nor the policy underlying the statute support application of the exception since excepting the debt from discharge would benefit only the third party professional.” Simon, Schindler & Sandberg LLP v. Gentilini (In re Gentilini), 365 B.R. 251, 259 (Bankr. S.D. Fla. 2007) (emphasis added).
10. 11 U.S.C. § 362.
11. “In particular, we noted that the state divorce court had concurrent jurisdiction with the bankruptcy court to determine whether the divorce obligation was ‘in the nature of support’ for purposes of § 523(a)(5), and we ruled that the bankruptcy court should await the divorce court’s clarification of its intent regarding the amount of support provided in its award.” Cummings v. Cummings (In re Cummings), 277 Fed. Appx. 946, 947 (11th Cir. Fla. 2008).
12. 11 U.S.C. § 362(b)(2)(B) provides that the holder of a DSO claim may levy on non-estate assets without violating the automatic stay.
13. “In Carver v. Carver, 954 F.2d 1573, 1579-80 (11th Cir. 1992), we held that in some narrow circumstances, bankruptcy courts ought to abstain from imposing sanctions for violations of the automatic stay where the underlying actions involved domestic support obligations.” Russell v. Caffey (In re Caffey), 384 Fed. Appx. 882, 885 (11th Cir. Ala. 2010).
14. 11 U.S.C. § 523(a)(1).
15. 11 U.S.C. § 523(a).
16. 11 U.S.C. § 523(a)(13).
17. 11 U.S.C. § 523(a)(5) and (15).
18. 11 U.S.C. § 523(a)(1)(5).
19. Those reasons include: failure to provide requested tax documents; failure to complete a course on personal financial management; transfer or concealment of property with intent to hinder, delay or defraud creditors; destruction or concealment of books or records; perjury and other fraudulent acts; failure to account for the loss of assets; and violation of a court order or an earlier discharge in an earlier case commenced within certain time frames before the date the petition was filed.
20. In fact, the concurrent jurisdiction of domestic actions with bankruptcy court jurisdiction leads the courts to freely abstain (not leave the matter before bankruptcy court, but rather send it back to the divorce court) so as to permit the “other” court to handle the dispute between the parties.
21. 11 U.S.C. § 523(a)(5) and (15).
22. Rosenfeld v. Rosenfeld, (In re Rosenfeld), 558 B.R. 825 (E.D. Mich. 2016), citing “[w]hen — for whatever reason — the dispute discontinues or [the court is] no longer able to grant meaningful relief to the prevailing party, the action is moot, and we must dismiss for lack of jurisdiction.” United States v. Blewett, 746 F.3d 647, 661 (6th Cir. 2013) (Moore, J., concurring) (citing Knox v. Serv. Emp. Int'l Union, 132 S. Ct. 2277, 2287, 183 L. Ed. 2d 281 (2012)).
23. Pigs are cute; hogs get slaughtered.
24. Perkins v. Petro Supply Co. (In re Rexplore Drilling), 971 F.2d 1219, 1226 (6th Cir. 1992).
25. Tronox Inc. v. Kerr McGee Corp. (In re Tronox Inc.), 503 B.R. 239, 330 (Bankr. S.D.N.Y. 2013).
26. 11 U.S.C. § 547(c)(7).
31. In 1999, this was an issue delivered to the Eleventh Circuit. “Federal courts attempting to interpret Florida law regarding this issue have reached contrary conclusions. Compare In re Mesa, 232 B.R. 508 (Bankr. S.D. Fla. 1999) (imposing equitable lien on homestead); In re Kravitz, 225 B.R. 515 (Bankr. D. Mass. 1998) (denying homestead exemption when debtor acted with actual fraudulent intent); In re Bandkau, 187 B.R. 373 (Bankr. M.D. Fla. 1995) (denying homestead exemption to extent that it was purchased with nonexempt money); In re Thomas, 172 B.R. 673, 674 (Bankr. M.D. Fla. 1994) (granting objection to claimed homestead exemption under Fla. Stat. § 220.30); In re Coplan, 156 B.R. at 92 (limiting homestead exemption when homestead was acquired in fraud of creditors); In re Grocki, 147 B.R. 274, 278 (Bankr. S.D. Fla. 1992) (imposing equitable lien on homestead); In re Gherman, 101 B.R. 369, 370 (Bankr. S.D. Fla. 1989) (sustaining objection to homestead exemption where debtor used fraudulently converted funds to purchase homestead), with Bank Leumi, 898 F. Supp. at 887 (refusing to create nontextual exception to homestead exemption based on fraudulent intent of debtor); In re Hendricks, 237 B.R. at 825 (allowing homestead exemption); In re Young, 235 B.R. 666 (Bankr. M.D. Fla. 1999) (holding that homestead exemption could not be disallowed because nonexempt assets were used to acquire homestead even if debtor fraudulently converted nonexempt assets with intent to defeat creditor’s claims); In re Lazin, 221 B.R. 982, 988 (Bankr. M.D. Fla. 1998) (finding that conversion of nonexempt assets into homestead with intent to hinder, delay or defraud creditors is not exception to homestead exemption); In re Lee, 223 B.R. 594 (Bankr. M.D. Fla. 1998) (finding debtor’s intent to defraud creditors did not constitute basis for disallowing Florida homestead exemption); In re Statner, 212 B.R. 164 (Bankr. S.D. Fla. 1997) (allowing homestead exemption); In re Clements, 194 B.R. 923 (Bankr. M.D. Fla. 1996) (holding that debtor is entitled to keep homestead as exempt even if it was acquired in fraud of creditors); In re Miller, 188 B.R. 302 (Bankr. M.D. Fla. 1995) (upholding homestead exemption even though its purchase was fraudulent transfer as to creditors); In re Popek, 188 B.R. 701 (Bankr. S.D. Fla. 1995) (allowing homestead exemption); In re Lane, 190 B.R. 125 (Bankr. S.D. Fla. 1995) (allowing homestead exemption).” Havoco of Am. Ltd. v. Hill (In re Hill), 197 F.3d 1135, 1141-1142 (11th Cir. Fla. 1999). The Eleventh Circuit sent the following issue to the Florida Supreme Court: “Does Article X, Section 4 of the Florida Constitution exempt a Florida homestead, where the debtor acquired the homestead using non-exempt funds with the specific intent of hindering, delaying, or defrauding creditors in violation of Fla. Stat. § 726.105 or Fla. Stat. §§ 222.29 and 222.30?” Havoco of Am. v. Hill, 790 So. 2d 1018, 1019 (Fla. 2001). The Florida Supreme Court concluded, “Accordingly, we answer the certified question in the affirmative, holding that a homestead acquired by a debtor with the specific intent to hinder, delay, or defraud creditors is not excepted from the protection of article X, section 4. Having answered the certified question, we return this case to the United States Court of Appeals for the Eleventh Circuit for further proceedings.” Havoco of Am. v. Hill, 790 So. 2d 1018, 1030 (Fla. 2001).
32. This is without any reference to 11 U.S.C. § 522(o).
34. In re Covington, 2006 Bankr. LEXIS 2485, 56 Collier Bankr. Case 2d 1110, 2006 WL 2734253 (Bankr. E.D. Cal. 2006).
35. In re Ruppell, 368 B.R. 42, (Bankr. D. Or. 2007).
36. In re Quezada, 513 B.R. 621, (Bankr. S.D. Fla. 2007).
37. 11 U.S.C. § 522(l) and Fed. R. Bankr. P. 4003(b)).
38. Judge Mark hints at such in Quezada when he wrote, “New § 522(c) (1) creates a federal right entitling DSO creditors to execute against exempt assets even if those assets would be protected from execution under state law. Although, in theory, a state court judge is perfectly capable of applying federal law, in practical terms, it appears awkward for a DSO creditor to seek relief in state court to pursue assets which are exempt from execution under state law.” In re Quezada, 368 B.R. 44, 49 (Bankr. S.D. Fla. 2007).
39. “Without question, BAPCPA enhances the protections to and rights of DSO creditors. These rights include the right under § 522(c)(1) to pursue assets claimed as exempt in a bankruptcy case to satisfy a DSO debt, even if the asset would be protected from execution under state law.” In re Quezada, 368 B.R. 44, 50 (Bankr. S.D. Fla. 2007).
40. For instance, liquidating the homestead of the former spouse is not permitted. While in bankruptcy, as provided under 11 U.S.C. § 522(c)(1), the opposite is provided.

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