Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Right To Support When Your Ex Files Bankruptcy

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Outrage is the usual reaction when a former spouse who owes you child support or alimony files bankruptcy.

It reinforces all those less-than-flattering thoughts you harbor about your ex.

But maybe that’s not the right reaction for two reasons, one old, one new.

One is old: support debts can’t be wiped out in bankruptcy.

The second reason is new: failure to pay support is grounds for dismissal of a bankruptcy case.

You may have levers that weren’t available to you before as a former spouse.

Unpaid support dooms reorganization

Chapter 11 and Chapter 13 are reorganization chapters of bankruptcy.  The person filing for relief stays in possession of their assets and proposes a plan to solve their financial problems.

If you’re in financial trouble, it seems to offer the best of both worlds:  you keep your stuff and get immediate protection from your creditors.

But there’s a condition.  The debtor needs to stay current on support obligations that come due after he files the bankruptcy case.

Failure to pay domestic support obligations (the Bankruptcy Code’s catch phrase for alimony, spousal support, child support or family support) is ground for dismissal of the reorganization case, or conversion to Chapter 7, where a bankruptcy trustee takes control with an eye to liquidating assets.

That is just what happened in a case where I represented a spouse with an order for temporary support.

Husband had never paid on the support order before or after the the bankruptcy was filed.

Consequence:  husband’s Chapter 11 case was converted to Chapter 7 because he failed to meet the terms of the family court support order.  Section 1112 (b)(4)(P) lists failure to pay a domestic support obligation cause for conversion or dismissal of the case.

For this client, conversion has a second benefit:  husband’s wages earned after conversion are not protected by the bankruptcy code. My client will be able to get an earnings withholding order to direct his future earning toward the unpaid support.

Support debts never dischargeable

No matter what chapter of bankruptcy is selected, the debtor cannot wipe out support obligations.  Support is expressly made non dischargeable by 11 USC 523(a)(5).

If the bankruptcy case is one where payment is going to be made to creditors, support is the very first debt in line for payment.  The distribution scheme in bankruptcy provides that a debt with priority gets paid in full before debts with lesser priority are paid.

You need to file a proof of claim, however, in order to be paid.

Property that the debtor is able to exempt from the claims of other creditors is not protected from claims for a domestic support obligation.  11 USC 522(c)(1).

The unanticipated benefit of a bankruptcy of the spouse ordered to pay support is that other, non support debts may get discharged.  That leaves fewer creditors competing for payment with the support order.

So, things may not be so bad as they first seemed.

If you have an unpaid domestic support order and your ex files bankruptcy, get help from an experienced bankruptcy lawyer.  You may have cards to play in this game.

More

How to make your divorce bankruptcy-proof

Dividing debts in divorce

Bankruptcy myths

The Most Costly Community Property Blunder

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california map with roadsWhat do you do when creditors from your spouse’s past threaten?

Chances are your first reaction is to put the title to your biggest assets in just your name.

Whew! Safe.

Not.

Just because  the deed to the house now reads Jane Doe instead of John Doe and Jane Doe it’s easy to think the house is Jane’s separate property and  the operation of California community property law has been beaten back.

Wrong.

Character matters, even for property

Why does it matter whether the house or a business is community property?  Because the character of the property determines which creditors of the married couple can levy on the asset to pay a debt.

Community property is available to creditors of either spouse, for debts incurred during their marriage and before marriage.

Ouch!

Registered domestic partners are also presumed to have community property and are subject to the benefits and burdens of community property.

One couple I saw this week had started a business during the marriage and issued the stock in the corporation in the name of one spouse alone.  They thought that holding the stock in just one name made it the separate property of the named spouse, and insulated the business from the $ 1 million pre marriage tax debt of the other spouse.

Nope.

California law starts from the proposition that all property acquired by a married person during the marriage is community property. CA Family Code 760.   Which spouse’s name is on the property doesn’t alter the character of the property.  So when a married woman buys a house in her name alone, it is presumed to be community property.

By statute, the exceptions to the presumption of community property cover

  • property acquired by one spouse before marriage
  • property acquired during marriage by gift or inheritance
  • income generated by separate property

Defeating the community property presumption

If you want to beat the presumption, you have two alternatives.

The first is a prenuptial agreement that defines whether you will have community property in your marriage.  You are perfectly free to make such an agreement.  It needs to be in writing and is subject to rules about genuine understanding about the effect of the agreement.  Remember the Barry Bonds case?

The second is transmutation.  That’s a big word that means changing the legal character of property already owned by the couple.  Because transmutation has such a significant effect on the legal rights of the spouses and their creditors, California law sets out the requirements of a valid transmutation.  Family Code 852.

To be effective in law, a transmutation must be

  • in writing
  • expressly provide for a change of character of property
  • made by or consented to by the party adversely affect.

Creditors may upset transmutation

Remember that the claims of creditors on the community property was the usual reason spouses try to change the character of property, to build a wall around an asset that the creditors of one spouse might reach.

For that reason, transmutations are subject to that collection of laws that prohibit transfers that frustrate creditors’ rights.  Those laws, dating back to the 17th century, allow creditors to follow property transferred without consideration, i.e. an exchange of value, even though now titled to someone else.

California statutes on transmutation clearly warn that transfers among spouses are subject to the laws of fraudulent transfer.  Transfers of real property between spouses are only effective if the deed is recorded.

Community property take away

If you are content to have your accumulations during marriage classified as community property, it’s hard to muck that up on your own.

But if you, and your mate, genuinely want some or all of your assets to be the separate property of one spouse, to the exclusion of any interest in the other spouse, you need to do far more than just change the name on title.

More on community property basics.

*In the event of divorce, it determines whether the court can divide the property.

Image courtesy of Wikimedia.

Marital Separation Doesn’t Require Two Homes

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Split the sheets in California, and your wages are no longer community property.

That’s because property acquired during marriage but after a marital separation isn’t community property.

That’s been California law for a long while.

The sticky wicket has been drawing the line when the marriage has broken down and the couple has separated.

“When” they separated determines whether the estranged spouses have to split their earnings with each other.  It determines whether the creditors of one spouse can reach the wages of the other to pay the other’s debts.

Can estranged spouses live under the same roof and be living “separate and apart”?

Supreme Court makes separation expensive

In 2015, the California Supreme Court ruled that a couple isn’t “separated” when they live in the same house.  Even when they  shared little else besides the address.

In the Bay Area,  land of ruinous housing prices, I’ve seen many estranged couples continuing to share a house for a long while because neither can afford to move out.

Yet, according to the Davis decision, a couple is not separated and they continue to acquire community property until they no longer live in the same dwelling.

New law looks beyond common address

The justices kinda invited the legislature to change the law if they didn’t like the Davis result.  And they did.

New California law provides that spouses can live “separate and apart” under the same roof for purposes of California community property law.

Seven things you probably didn’t know about community property

The new law makes determining the date of separation messier, but more in conformity with economic realities.

A court trying to determine whether assets are community property has to look beyond the residence address.  Other indicators, not just where the spouses live, can show that there is no intention to resume the marriage.

Why this matters

Assets acquired during marriage and before separation are community property.  Simplest example is wages.

But suppose one spouse starts a business or writes a best seller when the marriage is rocky.  If there has been no separation, the business or the book royalties must be divided equally.

If STBX files bankruptcy

If the spouses have separated, different result.  The new asset is the sole property of the spouse who created it.

Or, more prosaically, suppose one spouse buys an expensive new car.  If they’ve separated, the debt is exclusively the responsibility that of the borrower.  If they aren’t living “separate and apart”, the debt is payable from the community.

Dividing debts in divorce

The new look at what it means to live “separate and apart” will inject more reality in the the “when” question, at the expense of making the determination more complex.

Image courtesy of  John Getchel  under a Creative Commons license.

“Hold Harmless” Survives “To Have and To Hold”

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money trouble

 

Divorce usually requires the division of the debts of the marriage along with the assets.

The legalese usually requires each party to indemnify and hold harmless the other from the debts assigned to that party.

Most folks skim over that provision to worry about the division of assets or support issues or the termination of their status as married people.

But that may be a mistake.

Long after the personal property that was divided has worn out and the need for support has passed, the right to indemnification may live on.

Given the length of some statutes of limitation and an industry selling and collecting on time barred debt, the obligation to indemnify your ex may live longer than the marriage.

So, what’s indemnification all about?

Indemnification creates a new debt

First, let’s define indemnify.  It means to make someone whole should they suffer a particular kind of loss.

In the case of a divorce, a right to indemnity would require one spouse to pay all the damages inflicted on the other by reason of a debt assigned to the other spouse.

Example:  Suppose there’s a joint credit card and the liability is assigned to Husband.  If he fails to pay the debt, and the creditor sues Wife to collect, the right of indemnity gives the Wife who had to pay the debt the right to sue Husband, who is required to make good everything she had to pay to the creditor.

At the heart of the matter is the fact that the division of debts between the spouses doesn’t alter the collection rights of other entities not party to the divorce.  Put another way, the divorce judgment can’t change a contract the spouses made with a third party.

The divorce can only create a new obligation between the spouses:  if the spouse who was assigned the debt doesn’t pay, and the other spouse has to pay because of the preexisting liability on a contract, the spouse who was assigned the debt now has to pay the other spouse.

Debt to ex spouse not dischargeable in 7

Once you recognize that the language in a divorce judgment about indemnification creates a debt between the spouses, you start to see the bankruptcy implications.

Bankruptcy law provides that no debts between spouses arising from a divorce can be discharged in Chapter 7.  Those non support debts between spouses can be discharged in Chapter 13.

Nothing keeps an ex spouse from discharging the obligation to the creditor in a Chapter 7.  The discharge just doesn’t relieve the debtor from any obligation to indemnify the ex spouse should the creditor collect the assigned debt.

Four tips to avoid that debt

In a perfect world, each spouse would be both capable and willing to pay the debts assigned to them.  But the world is less than perfect.

If you’ve just had to pay a debt assigned to your ex, a chance to sue your ex to make good your loss isn’t very satisfying.  Better than the alternative, but still not great.

Recognizing the long time line on indemnification rights, it’s worth trying to your exposure to rights of indemnification.

In the course of the divorce, consider these approaches:

  • Pay off joint debts to the extent possible
  • File a joint bankruptcy so that neither spouse is liable on joint debts
  • Divide debts as nearly as possible in line with the legal liability for the debt
  • Provide that the right to indemnification is an element of support one spouse owes the other

Alone, or in tandem, these approaches can simplify your life going forward.

More on family & debt

When your ex files bankruptcy

When bankruptcy and divorce collide

Bankruptcy myths

 

 

Divorce And The Ticking Debt Bomb

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Debts of the marriage often outlive the marriage itself.

Left-over debts are nothing but trouble.

But too often, divorcing couples don’t mop up the joint debts they held during the marriage, and the situation blows up years later when one ex-spouse hits financial trouble.

Joint account remained open after divorce

It’s playing out in a bankruptcy case I have now:

  • divorce final for decades.
  • no balance on joint line of credit when the spouses divorced
  • no one closed the account

When one spouse hit a rough patch, she accessed the left-over line of credit, big time.  But it wasn’t enough to avoid the need for bankruptcy.

My client’s financial mess threatens to slop over to the former spouse who remained listed on a dormant line of credit.

Even though the current debt is long after the divorce, the ex spouse remains liable to the lender because his name is on the account.

During the marriage, the community would have gotten the benefit of the community property discharge.  Not so after divorce, when there is no community.

What is discharged on joint debt

My client can discharge the debt to the lender, but not the debt to the long-since ex spouse.  That’s because obligations between spouses, such as the division of debt, can’t be discharged in Chapter 7

Unpaid support in bankruptcy

I see a couple of possible outcomes in my case:

  • The indemnification clause in the divorce agreement will require my client to make the ex whole.
  • The other spouse’s reported efforts to close the account will serve to insulate him from the debt.
  • In the face of the bankruptcy, the lender will not pursue the uninvolved ex.

It’s early days on this particular episode.  But the broader lesson is clear:  clean up all joint financial matters during the divorce.

Every joint obligation left for untangling later is a ticking time bomb.  Leaving a refinance, a property transfer, or a joint account for “later” exposes one ex spouse to the debts and financial travails of the other.

Former spouses got a big bump in their protections from consequences of bankruptcy filings by their ex’s in the bankruptcy “reform” act of 2005.  Now, no debt created by a divorce is dischargeable in a  Chapter 7.

So the obligations created by an agreement to indemnify or hold harmless the other spouse from debts will survive Chapter 7.

But the value of that indemnification right may be questionable if the person required to protect the other former spouse has just gone through bankruptcy.  If the protected spouse has to pay the lender, the only remedy is to sue the ex, who just went through bankruptcy.

So, clean up the debt situation in the divorce, just as thoroughly as you divide the assets.

Image courtesy of Fort Meade.

Five Ways To Bankruptcy Proof Your Divorce

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bullet proof vestIf you want to survive the bankruptcy of your ex spouse unscathed, you need to consider the bankruptcy possibility during the divorce.

A marital settlement, binding outside of bankruptcy, means little in Chapter 13.

No matter how prejudicial or unfair, a Chapter 13 discharge will relieve a former spouse of obligations of all obligations to their ex except for support.

It’s too late to protect your hard won rights to non support payments once the bankruptcy is filed.

Let’s look at how ex spouses are vulnerable to a bankruptcy discharge, then explore ways to eliminate or reduce your exposure to a later bankruptcy filing by your ex.

Only in 13

Chapter 13 is a reorganization plan for individuals with regular income and debts less than the statutory ceilings.

It’s the only kind of bankruptcy case that allows a debtor to discharge non support obligations to a former spouse.

All debts owed to a spouse or child are non dischargeable in Chapter 7.

So, any obligation to pay to equalize the division of property or any obligation to hold a former spouse harmless from a debt of the marriage is ripe for discharge in Chapter 13.

The only lever a creditor-spouse has is to challenge the confirmation of a Chapter 13 plan for failure to comply with the law or for lack of good faith.  That’s chancy and expensive.

Prevention is more reliable.

Make your divorce bankruptcy-proof

Here are five strategies to insulate the division of assets and debts from upset by a Chapter 13 bankruptcy by one of the former spouses. [Read more…]

Dividing Debts At Divorce: What You Need To Know

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The division of the debts of a failed marriage, however carefully crafted at divorce, can be utterly destroyed if one of the former spouses files a Chapter 13 bankruptcy.

A Chapter 13 discharge is double barreled.  It will eliminate the debts that the filing spouse owes to creditors.  It also wipes out any obligation to the debtor’s former spouse to shield the ex from those debts.

It gets worse:  any obligation of one party to pay the other to equalize the division of assets can be wiped out in a Chapter 13.  (Support debts survive; they aren’t dischargeable anywhere, any time.)

All parties, the divorcing spouses and their family law attorneys, need to consider the impact on the division of assets and liabilities if either spouse drops the bankruptcy bombshell.

Debts divided and protection promised

Where both spouses are liable on a debt, the divorce agreement often does two things.  It assigns the debt to one spouse for payment.  Two, it imposes on that spouse an obligation to indemnify the other spouse.

“Idemnify”  isn’t in most folks’ standard vocabulary.  According to Merriam Webster, it means

to protect (someone) by promising to pay for the cost of possible future damage, loss, or injury

The spouse who’s to pay the debt promises to pay the former spouse if the creditor has to collect the debt from the other party.  So, the divorce decree creates two duties for the spouse to whom the debt is assigned:  pay the creditor, and if you don’t, protect your ex from that creditor.

Different chapters of bankruptcy treat the obligation to a former spouse for indemnification differently.   In Chapter 7, that obligation is not dischargeable.  In Chapter 13, it can be discharged.

But why, you ask, doesn’t the divorce judgment bind the creditor, too? [Read more…]

Bankruptcy And Divorce Collide: The Revenge Filing

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My soon-to-be ex threatens to file a bankruptcy tomorrow and get me kicked out of the house.

The frantic voice on the phone wanted to know whether he could do that in California.

Or better, how he could be stopped from upsetting the pending divorce through the bankruptcy courts.

Welcome to the volatile collision between bankruptcy and divorce.

Let’s walk through the bankruptcy law that affects those in the middle of a divorce.

Everyone has the right to file bankruptcy

No one can be ordered not to file bankruptcy.

Bankruptcy relief is a right under federal law.  No state court can prevent someone from filing; no agreement to refrain from filing is enforceable.

Interested parties can police the debtor’s compliance with bankruptcy law, with an eye to pushing the debtor out of bankruptcy or into a reorganization chapter, but they can’t prevent a bankruptcy filing.

All community property comes into bankruptcy

The woman on the phone was right to see that the family home would be sucked into any bankruptcy case her estranged husband filed. [Read more…]

Same Sex Couples No Different In Bankruptcy

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gay couple-flicker cc croppedSame sex couples encounter financial troubles no differently than heterosexual couples.

We live in “interesting” times as bankruptcy courts feel their way through the collision between  California’s state laws on domestic partnerships and married same sex couples and the federal law found (and now ignored) in DOMA.

Lead by judges in the Central District of California,  the Northern District of California bankruptcy judges have quietly but publicly stated that they will not sua sponte challenge joint filing by same sex married couples.

But whether a couple are registered domestic partners or married, under California law, they have community property. [Read more…]

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