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Bankruptcy and Your Family Law Case Michael J. Hebenstreit Eric N. Engebretson Whitham, Hebenstreit & Zubek, LLP.

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Presentation on theme: "Bankruptcy and Your Family Law Case Michael J. Hebenstreit Eric N. Engebretson Whitham, Hebenstreit & Zubek, LLP."— Presentation transcript:

1 Bankruptcy and Your Family Law Case Michael J. Hebenstreit Eric N. Engebretson Whitham, Hebenstreit & Zubek, LLP

2 New – What is discharged? Child Support (Alimony & Maintenance) 523(a)(5)Ch 7Not Discharged Ch 13Not Discharged  Property Settlement  523(a)(15)Ch 7 Not Discharged  Ch 13 May Be Discharged

3 Chapter 7: STRAIGHT LIQUIDATION  All assets = property of the bankruptcy estate  Most debts - subject to discharge  Post filing earnings - not involved  Child support - not discharged  Property settlement – not discharged Chapter 13: REPAYMENT PLAN  Treatment of debt depends on category of debt  Child support - not discharged  Property Settlement – subject to discharge

4 CATEGORIES OF DEBT Priority  Costs of Administration  Tax Obligations  Domestic Support Obligation Secured  Car  House  Business Equipment Unsecured  Credit Cards  Medical Bills  Hold Harmless Agreements

5 Automatic Stay The automatic stay prevents: the commencement or continuation of any Court proceedings. execution by a judgment creditor against the debtor or property of the bankruptcy estate. any action to obtain property of the debtor or exercise control over property of the debtor. any act to create, perfect, or enforce a lien. any act to collect, assess or recover any claim against the debtor that arose prior to the date of filing. and generally, any action whatsoever to enforce any kind of claim that existed prior to the date of filing against debtor.

6 DURATION OF STAY Case is closed Case is dismissed Discharge granted or denied Motion for Relief From Stay

7 AUTOMATIC STAY: Domestic Matters Filing of bankruptcy relief DOES NOT operate as a stay with respect to: the commencement or continuation of a civil action or proceeding:  for the establishment of paternity;  for the establishment or modification of an order for domestic support obligations;  concerning child custody or visitation;  for the dissolution of marriage, except to the extent that such proceedings seeks to determining a division of property that is property of the estate; or  regarding domestic violence.

8 AUTOMATIC STAY: Enforcement Filing of bankruptcy relief DOES NOT prevent:  the collection of a DSO from property that is not property of the estate. 11 U.S.C. §362(b)(2)(B)  the withholding of income that may be property of the estate for payment of a DSO.  the withholding, suspension, or restriction of a driver’s, professional or recreational license.  the reporting of overdue support owed by a parent to any consumer reporting agency.  the interception of a tax refund.  the enforcement of a medical obligation.

9 PROPERTY OF ESTATE What is it  All property or property rights  Date of filing or within 180 days for divorce Role of Trustee  Investigate First Meeting of Creditors (341 Hearing)  Sell Assets & Distribute or NDR  Bad Acts

10 Indiana Exemptions Debtor filing in Indiana is allowed to protect:  Up to $17,600 of equity in the debtor’s principal residence;  Up to $9,350 in personal property;  Up to $350 in cash, bank accounts, and intangibles;  All interest in real estate owned as tenants by the entireties except to the extent the certain joint debts are to be discharged;  Any interest in an educational IRA; and  Any interest in a tax qualified retirement account. In the event of a joint filing, each debtor may claim the above exemptions.

11 DISCHARGE Voids any judgment Injunction against Debtor Injunction against property of Debtor

12 EXCEPTION TO DISCHARGE §727  Bad Acts  Deny fresh start Particular types of debt  Taxes  Fraud/dishonesty  Family law issues (DSO)

13 Domestic Support Obligation (DSO) 11 USC § 101(14A) (14A) The term "domestic support obligation" means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable non-bankruptcy law notwithstanding any other provision of this title, that is--owed to or recoverable by-- (i) a spouse, former spouse, or child of the debtor or such child's parent, legal guardian, or responsible relative; or (ii) a governmental unit; (B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child's parent, without regard to whether such debt is expressly so designated; QUERY – is payment of joint credit card DSO? - is payment of attorney fees DSO? (C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of-- (i) a separation agreement, divorce decree, or property settlement agreement; (ii) an order of a court of record; or (iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and (D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child's parent, legal guardian, or responsible relative for the purpose of collecting the debt.

14 Exceptions to Discharge 11 USC § 523 (a) A discharge under…this title does not discharge an individual debtor from any debt - (5) for a domestic support obligation; or (15) to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce of separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit.

15 Non-Dischargeable Determination Pre BAPCPA  60 days to file adversary for property settlement  Balancing test Now  Automatically non-dischargeable  No adversary necessary Child Support Property Settlement

16 CHAPTER 13 Regular income Generally 5 years Can’t prefer one class of creditor Co-Debtor stay Pay priority debts first (D.S.O.)

17 General Concepts of Chapter 13 Plan Funded by post filing earnings Confirmation  Distributions = to Chapter 7  Best efforts  Disposable earnings Discharge  Complete Plan

18 Why Chapter 13 Best option for DSO payor Means Test Arrearages  Tax  Mortgage  Child Support

19 DSO Priority The following expenses and claims have priority in the following order:  Allowed unsecured claims for DSO that, as of the date of the filing, are owed to or recoverable by a spouse, former spouse, or child of the debtor, or such child’s parent, legal guardian, or responsible relative, without regard to whether the claim is filed by such person or is filed by a governmental unit under this title after the date of the filing of the petition shall be applied and distributed in accordance with non-bankruptcy law.

20 DSO Priority Continued  Subject to claims under subparagraph (A), allowed unsecured claims for DSO that, as of the date of the filing of the petition, are assigned by a spouse, former spouse, child of the debtor, or such child’s parent, legal guardian or responsible relative to a governmental unit or are owed directly to or recoverable by a governmental unit under applicable non-bankruptcy law, on condition that funds received under this paragraph by a governmental unit under this title after the date of the filing of the petition be applied and distributed in accordance with applicable non-bankruptcy law.

21 Payment of Child Support in CH 13 Different Treatment To spouse  Pay in full in cash Title IV-D  5 years  All projected disposable income  Payment in full not required

22 CHAPTER 13 DISCHARGE Certification of payment of all DSO  Both pre & post filings Child Support (a)(5) never discharged Property settlement (a)(15) may be discharged  What is property settlement –vs- support? Hardship Discharge  Unable to complete plan - beyond Debtor’s control  Paid Chapter 7 equivalent  Modification of CH 13 plan not permitted  BUT excludes debts under 523(a) No discharge for (a)(5) or (a)(15)

23 LANGUAGE IN DECREE Invalid  Against public policy Federal Bankruptcy Law –vs- State Family Law  Look at facts  Issue preclusion & res judicata What to Do? - - most important in Chapter 13  Can’t waive Bankruptcy relief  Can stipulate to facts

24 Drafting Tips Characterization of Marital Debts. Although support and Property settlement obligations are dischargeable in a Chapter 7, the distinction between the two Is important in a Chapter 13. In a Chapter 13, debts in the nature of child support, alimony and maintenance are never discharged while property settlement obligations may be dischargeable. Remember that the waiver of discharge or the determination by a state court that debts are non-dischargeable is not absolutely binding on a bankruptcy court. The following language is suggested as a way to protect the wife.

25 Payment of Debt Obligation Language Payment of Debt Obligations. Husband shall pay the outstanding obligations with respect to the VISA credit card, the Discover card, and the American Express card. Husband agrees to indemnify and hold wife harmless with respect to any non -payment of such obligations which hold harmless and indemnification shall include, but not be limited to any reasonable and necessary attorney fees incurred by the wife. Both the credit card payment obligations as well as the hold harmless obligation are in the nature of maintenance and alimony for the wife as set forth in 11 U.S.C.§523(a)(5) and not as set forth in 11U.S.C. §525(a)(15) and are non-dischargeable in the event of a subsequent bankruptcy action filed by the husband.

26 Hold Harmless Agreements DebtorVISA INDEMNITY Wife Does wife have to pay debt first?

27 Contempt –vs- Pro Supp (TR69) Payment of sum certain whether in lump sum or installments – Pro Supp Contempt appropriate  Child Support Thompson; Isler v. Isler 422 NE2d 416 (1981)  Visitation expenses Chapman  Maintenance. Thompson  Failure to perform a provision of divorce decree. Dawson  Order to transfer property to other. State ex rel. Dale v. Boone Superior Court 299 NE2d 611 (1973)  Pay mortgage. Thompson  Obligation to refinance 2 nd mortgage. Dawson  Provide health insurance. Thompson  Pay creditors of others. Thompson; Marburger v. Marburger 372 NE2d 1250 (1978)

28 Contempt –vs- Pro Supp Con’t. Willful  Order must be clear & ambiguous. Staresnick  DEFENSE – Incapable of compliance Remedy  What... Money damage to compensate for injuries cause by contempt. Cowart; Phillips  How Much… Consider inconvenience and frustration. Consequential damages. Thompson

29 Property of Bankruptcy Estate Child Support NO Property Settlement Agreement Fraudulent Transfers

30 Fact Scenarios Michael J. Hebenstreit Whitham Hebenstreit & Zubek, LLP

31 Child Support If all property owned by a debtor or to which the debtor was entitled to receive as of the date of filing constitutes property of the bankruptcy estate, if a child support arrearage is owed to the debtor at the time of filing, does the child support arrearage constitute property of the bankruptcy estate, thereby allowing the trustee to collect such amounts and administer those for the benefit of unsecured creditors?

32 Contempt The mother files a Motion for Contempt in state court alleging that the father had not complied with the terms of the divorce decree. The father subsequently files a bankruptcy action. Without obtaining relief from the automatic stay, the state court proceeded with a hearing and held the father in contempt and ordered the father to pay mother’s attorney fees and costs. Was it proper for the divorce court to proceed notwithstanding the filing of the bankruptcy?

33 Judicial Liens Can judicial liens be avoided? In handling the dissolution, if the facts are similar to this scenario and the wife is to receive funds in the future from the husband, rather than setting forth a judicial lien in the divorce decree, the husband should execute a promissory note in favor of the wife which note would be secured by a voluntary mortgage against the real estate. Documentation of the obligation in this fashion would eliminate any lien avoidance possibilities by the husband in the event of a future bankruptcy

34 Marital Debt Husband and wife are divorced and husband is ordered to pay child support to wife. Additionally, husband is ordered to pay the joint Visa card with a balance of $8,000, the Sears card with a balance of $5,000, and the Capital One card with a balance of $10,000. Husband is financially strapped and seeks your counsel concerning filing a Chapter 7 bankruptcy. What advice do you give him?

35 Discharge of Attorney Fees In a post-decree modification of child support order, husband was ordered to pay child support and $1,000 to the mother to partially reimburse her for her attorney fees. Father files bankruptcy. Is he able to discharge the obligation to pay attorney fees?

36 Discharge of Attorney Fees If the court order obligated the husband to pay the $1,000 attorney fees directly to the attorney, does this analysis change?

37 Fee Language Assume a divorce decree that divided property and set forth child support obligations. Further assume that husband is ordered to pay $5,000 to wife’s attorney and that the obligation to pay attorney fees is contained in a separate portion of the divorce decree. The decree does not recite whether the attorney fees were incurred in connection with child support matters or property settlement matters. Are those attorney fees dischargeable?


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