There are many issues of law that can be explored in the intersection between bankruptcy law and divorce law. The purpose of this article is to summarize the state of the law regarding some of the most prominent issues that appear in consumer cases.
- The effect of a divorce judgment on the division of marital debt. There is a common misperception by individuals who are getting divorced that if a divorce judgment requires one of the two people to be responsible for various marital debts, that the so-called responsible person is the only person obligated on that debt. For example, if a divorce judgment requires a husband to pay the Citibank Visa account, but if both husband and wife signed for the Citibank account prior to the divorce case, then both parties can be responsible for the account notwithstanding any language in the divorce judgment to the contrary. A divorce judgment does not require Citibank to look only to the husband for payment of that account. Citibank can look to either party for payment of the account. At best, the wife may have the right to insist that the husband reimburse her for any money that she pays to Citibank on the account.
- Alimony and support versus division of marital debt. The Bankruptcy Code makes a distinction between how alimony and support is addressed in bankruptcy versus simple division of marital debt. Alimony and support are non-dischargeable debts. The division of marital debt may be dischargeable in Chapter 7 cases. Frequently it is difficult to determine whether or not debt is alimony and support or whether it is simply a division of marital debt. Several important bankruptcy decisions that address these issues are In re Dressler, 194 B.R. 290 (Bankr. R.I. 1996); In re Warren, 160 B.R. 395 (Bankr. D.M.e. 1993); In re Marquis, 203 B.R. (Bankr. D.M.e. 1997). These decisions help determine the circumstances under which obligations under a divorce decree are either alimony and support or a simple division of marital debt. When the issue is an award of attorney's fees in a divorce judgment, the case of In re Whitney, 265 B.R. 1 (Bankr. D.M.e. 2001) is worthwhile reading to understand that an order to pay attorney's fees is usually considered in the nature of alimony and support.
- The Automatic Stay and pending divorce actions. If a bankruptcy case is filed at the time that a divorce case is pending, the Automatic Stay prevents the Divorce Court from continuing to consider any divorce issues unless one of the parties to the divorce gets permission from the Bankruptcy Court for relief from the Automatic Stay. If the Bankruptcy Court grants relief from the Automatic Stay, then the divorce can proceed. Without such relief, the bankruptcy case must be stayed like any other pending court action against the debtor. Although parties to a divorce may forget that a pending divorce is stopped in its tracks by a bankruptcy filing, divorce courts are very sensitive to that event. Most divorce courts will refuse to take any action on pending divorces since a divorce court's orders or judgments could be void if they violate the Automatic Stay.
- Davis v. Cox. The most influential recent decision by the First Circuit Court of Appeals arising from the Maine Bankruptcy Court regarding the intersection of bankruptcy and divorce law is Davis v. Cox, 356 F. 3d 76 (1st Cir. 2004). This case is found on the 1st Circuit's website and the underlying decision from the U.S. Bankruptcy Court is located on the U.S. Bankruptcy Court of Maine's website, both of which is linked to this website.
In essence, the Bankruptcy Court, in Cox, attempted to delineate the role that bankruptcy plays on ongoing divorce actions and the effect, if any, a bankruptcy has on the determination of the parties' property rights and the division of debts. Any person who is in the midst of a pending divorce action and who may be obligated to pay significant marital debt while losing significant property should consider the holding in the Cox case to determine whether or not a bankruptcy filing may be of assistance in evening the playing field between the two divorcing parties. The Cox decision was upheld on appeal to the Federal District Court for the District of Maine. The First Circuit Court of Appeals overturned the decision of the Bankruptcy Court. The Court of Appeals held a certain property, which the Divorce Court had awarded to the non-debtor spouse, was held in a constructive or resulting trust for that spouse. The First Circuit's decision affords the Divorce Court more authority to determine property interests of non-debtor spouse. This case has been the subject of seminars between bankruptcy and divorce attorneys and is likely to guide attorneys in both areas of the law for years to come. If an individual contemplating bankruptcy is in the situation outlined above, he or she should make sure that their divorce counsel and bankruptcy counsel work together closely to be sure to provide the person filing bankruptcy the best counsel in both forms. Only by both divorce and bankruptcy counsel working together can a party be sure that the legal mine field described in the Cox case can be successfully navigated.
A divorce judgment merely rules on the relationship between the husband and the wife. A divorce decree can not bind Citibank regarding from whom Citibank can collect money it is owed.
In short, it is a mistake to think that a divorce judgment protects either a husband or a wife from creditors if the husband or the wife signed personally on any of the premarital debt.
The 2005 Bankruptcy Reform altered the relationship between debtors and their spouses in divorce. In Chapter 7, debtors must pay, as a non-dischargeable claim, any debt associated with a divorce judgment, whether it is in the nature of alimony or support (now known as a "domestic support obligation") or it is a property division. In Chapter 13, while domestic support obligations are non-dischargeable, property divisions are still dischargeable. Debtors with significant divorce property divisions should seriously consider the benefits of Chapter 13 to reduce his or her future financial obligations.
Should the non-filing spouse challenge the debtor spouse's ability to discharge certain marital debt? Is that debt alimony and support or division of marital debt? Would it be better to make that challenge in the Bankruptcy Court or later challenge the nature of the debt in Divorce Court (which has concurrent jurisdiction to make that determination if is not made in the Bankruptcy Court)? What is the cost associated with such a challenge in the Bankruptcy Court?
If a challenge is made to the discharge or certain marital debts, the burden of proof is on the party filing the complaint. Whether or not the debtor can afford to pay for the marital debt or whether or not the burden is greater on the debtor than the non-filing spouse to pay the support is determined under the circumstances of the parties as of the time of the trial of the Bankruptcy Court. It is important to note, that whether or not the debt is dischargeable or nondischargeable becomes a very fact intensive inquiry notwithstanding the labels placed upon the nature of the debt by the Divorce Court. See Werthen v. Werthen, (2002 Bankr. LEXIS 972).