“ Divorce and bankruptcy ” is a very general topic including many issues. In this article we address some of those issues based on the most frequently asked questions.
Federal courts have been trying to avoid disputes in this area for almost 150 years as they have given the matter of domestic relations to the states. It is difficult to implement this principle as there are 3 main constituencies, (1) The Debtor, (2) the Creditors, (3) and the former Spouse and any dependants.
Divorce affects assets and may create liabilities. Claims may come up from a circumstance between unrelated parties, such as personal injury, or breach of contract. These fall under the category of “debtor -creditor framework of bankruptcy” and ends with the claims of other creditors. The interpersonal claims arising from the division, or anticipated division of community-owned property do not fall under this category.
Divorce has its own unique obligations, most commonly for support, which are not considered debts or claims in the historic banking context. The complexity may vary depending on state, but California has their own unique characteristics relating to divorce and bankruptcy. Congress drew a boundary between family law and bankruptcy law in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (Pub L 109–8, 119 Stat 23), which became effective on 17 October , 2005, which enhanced rights of children and former spouses at the expense of the debtor. This has caused problems with former spouses and dependents, while it also created well financed creditors. Bankruptcy Code (S Rep No. 95–989, 95th Cong, 2d Sess (1978), reprinted in 1978 US Code Cong & Ad News 5787, 5840) states that the debtor must not be harassed and allowed them to attempt repayment or a reorganization plan, or may even relieve them of the financial pressures that drove them into bankruptcy. BAPCPA states that the dissolution proceeding is not precluded by an automatic stay, though this does still cause issues for courts to resolve. An example of an issue is when only 1 spouse files a bankruptcy petition when Real Property is involved. If only 1 spouse files in a case where the Real Property is jointly held, then the bankruptcy estate only acquires the debtor’s 50% joint tendency interest.
How divorce and bankruptcy will that affect property of the estate if a divorce was filed in the middle of bankruptcy?
Some courts will almost certainly conclude that the estate’s interests in property are determined as of the date the dissolution petition was filed and cannot be altered by subsequent events, hence the estate will include only a 50 percent interest in joint tenancy property notwithstanding the subsequent petition for dissolution. When an action is commenced, Automatic Restraining Orders come into effect Restraining people from particular actions such as taking the minor children out-of-state, applying for a passport or renewing a passport without the court’s approval, transferring property without court approval, or altering insurance coverage. Although spouses may file together, it is not possible to amend an individual bankruptcy petition to “add” the debtor’s spouse. Title 11 § makes it legal to fill out a joint bankruptcy petition if the parties are spouses, it does not allow creditors to file a joint, involuntary petition. Filing jointly does not mean that all the assets will be treated as a single estate, as the court must decide this. Bankruptcy Code §522 allows for debtors to exempt property from a bankruptcy estate, these exemptions are commonly known as “federal exemptions”; though a state may choose to opt-out and have their own lists, though federal exemptions may still apply in some cases even if the state has opted-out. California does not use Federal Exemptions and has 2 alternate lists that can be used instead known as the “703-series” and the “704-series” exemptions. There are several issues relating to divorce and bankruptcy exemptions that particularly affect spouses and former spouses. California exemption includes a provision at CCP §703.110(a) which limits spouses to a single exemption in specified items (including the homestead exemption). The prevision had met the constitutional requirements on many grounds and has equal protection. Codebtor spouses are prohibited by both California law and federal law from selecting two sets of exemptions. If the spouses cannot agree on which set of exemptions to pick, California law states they must pick 704-series exemptions. According to California Law relating to divorce and bankruptcy, spouses are permitted to terminate their marital status during bankruptcy without first obtaining relief from the automatic stay, “except to the extent that such proceeding seeks to determine the division of property that is property of the estate”. BAPCPA added a new Definition for “Domestic Support Obligation” in the bankruptcy code, which replaces an existing reference. 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 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—
(A) 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;
(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 non-bankruptcy 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.
California law allows a trustee or debtor in possession to avoid or rescind certain prebankruptcy transfers of property if those transfers favour one or some creditors over others. These transfers are called preferences. Support payments made shortly before bankruptcy fit this general definition as they support former spouses or children, leading to fear that they may be recoverable.
When you are handling both Divorce and Bankruptcy, it is important to know what you can and cannot do. We suggest you speak to a lawyer about your Divorce and Bankruptcy case. If you are located in Orange County California, you can call us and ask us about your Divorce and Bankruptcy specific situation (714) 390-3766