What happens when bankruptcy law and family law collide?
It’s all too common for one spouse to file a contempt proceeding in family court against an ex-spouse for not paying their spousal or child support payments; which in turn forces the other spouse to file a bankruptcy petition in bankruptcy court.
The Automatic Stay
The most important three words in any bankruptcy case – The Automatic Stay. The automatic stay “restrains a broad range of conduct, including the continuation of litigation and works as a general prohibition against ANY act to collect, assess, or recover a claim against a debtor that arose prepetition.
Exceptions to the Automatic Stay
Thankfully, the automatic stay contains twenty-six (26) exceptions. One of those subsections, Section 362(b)(2) concerns debts arising out of marital and parental relationships.
The Bankruptcy Court will grant relief from the stay under Section 362(d) if the party seeking relief demonstrates cause for the relief. The spouse seeking relief has the burden of persuasion or burden of proof, which means that they must convince the bankruptcy judge that cause exists to lift the automatic stay.
Section 362(b)(2)
Section 362(b)(2) lists several exceptions to the automatic stay:
- Commencement or continuation of a civil action or proceeding for the establishment or modification of an order for domestic support obligations …
- Commencement or continuation of a civil action or proceeding for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate…
- Commencement or continuation of a civil action or proceeding of the collection of a domestic support obligation from property that is not property of the estate…
- Commencement or continuation of a civil action or proceeding with respect to the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute….
Domestic Support Obligations have protected status
DSO’s have a special protected status in bankruptcy law. A debt that is in the nature of alimony, maintenance or support of a spouse, former spouse or child of the debtor is not dischargeable in either a chapter 7 or chapter 13 bankruptcy case. See 11 U.S.C. §§ 523(a)(5); 1328(a)(2).
Non-DSO marital obligation are nondischargeable in Ch 7 but dischargeable in Ch 13
Non-DSO’s or debts incurred “in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record” is nondischargeable in a chapter 7 case. See 11 U.S.C. § 523(a)(15).
However, a non-DSO marital obligation encompassed by 11 U.S.C. § 523(a)(15) is dischargeable in a chapter 13 case. See 11 U.S.C. § 1328(a)(2) (incorporating by reference certain chapter 7 nondischargeability provisions, but excluding § 523(a)(15)); see also Steele v. Heard, 487 B.R. 302, 308 & n. 9 (S.D.Ala.2013) (citing cases).
The characterization of a debt as a DSO or a non-DSO marital obligation is a question of federal bankruptcy law. See In re Gianakas, 917 F.2d 759, 762 (3d Cir.1990). Generally speaking, when an obligation is derived from a marital settlement agreement entered into by the parties, determining whether the obligation is in the nature of alimony, maintenance or support, as distinguished from a property settlement, depends on the intent of the parties at the time of the settlement agreement. Id. at 763.
Gianakas decision
In Gianakas, the Court of Appeals provided clear guidance regarding the methodology that bankruptcy courts should employ in determining whether a martial obligation is in the nature of support.
The Gianakas factors for a court to consider in distinguishing DSO’s from property division obligations:
(1) the labels in the agreement or court order;
(2) the income and needs of the parties at the time the obligation became fixed;
(3) the amount and outcome of property division;
(4) whether the obligation terminates on obligee’s death or remarriage or on emancipation of children;
(5) number and frequency of payments;
(6) waiver of alimony or support rights in agreement;
(7) availability of state court procedures to modify or enforce obligation through contempt remedy;
(8) tax treatment of obligation.
4 Collier ¶ 523.11[6][a]-[h].
