As a divorce lawyer practicing in Nassau County and Suffolk County on Long Island, NY, I see first-hand how financial problems are frequently the source of marital discord between spouses. Very often, we find that divorce proceedings and bankruptcy filings are often intertwined. Due to the relationship between divorce and bankruptcy, it is important to understand the inner-workings of both areas of law and how filing for bankruptcy during divorce proceedings may affect all of the parties involved. In particular, it is essential for non-debtor spouses to understand what support they are entitled to when a debtor-spouse files for bankruptcy.
Bankruptcy Does Not Discharge Child Support or Spousal Support in Long Island NY Divorce
The general concept of enabling a person to file for bankruptcy pursuant to the Bankruptcy Code is to provide a debtor with a “fresh start,” by essentially wiping the debtor’s slate clean. However, legislation, as well as case law, have provided that debts related to the enforcement of familial obligations, i.e. the payment of Child Support and Spousal Support, are non-dischargeable debts in bankruptcy proceedings. The non-discharge-ability of familial obligations is rooted in public policy considerations. The Bankruptcy Abuse Prevention & Consumer Protection Act (BAPCPA), which was enacted by Congress in 2005, provides reassurance to non-debtor spouses that they will be able to recover certain property and support owed to them by spouses declaring bankruptcy. The BAPCPA further intends to prevent debtors from shirking their familial obligations by opting to declare bankruptcy.
Bankruptcy Creates Estate for Debtor’s Non-Exempt Assets
With the filing of any bankruptcy petition, an estate consisting of the debtor’s non-exempt assets is created. In the event that a debtor files for bankruptcy during a pending divorce proceeding, state law must be consulted to determine if the non-debtor spouse holds any interest in the property of the estate. The non-debtor spouse must hold “an inchoate or contingent interest” in the property, otherwise, the filing of the bankruptcy petition by the debtor-spouse cuts off any interest in that property. In Re Hoyo, 340 B.R. 100 (Bankr. M.D. Fla. 2006). Conversely, the debtor’s right to receive property from the non-debtor becomes property of the debtor’s estate. Partial ownership with respect to property, such as joint tenancy, belongs to the estate of the debtor in a bankruptcy proceeding. Also belonging to the estate is any property acquired by way of inheritance, property distributed to the debtor through a settlement agreement with the non-debtor spouse, as well as property obtained through a final divorce decree within 180 days after the filing of a bankruptcy petition.
Debtor Must Pay Domestic Support Even in Bankruptcy
Upon the filing of a bankruptcy petition, any efforts or actions to collect debts owed to creditors are strictly barred by what is known as an “automatic stay.” The BAPCPA, however, provides exceptions to the automatic stay in that debtors must continue to meet any outstanding Domestic Support Obligations (DSOs). The Bankruptcy Code defines what constitutes as a DSO and establishes four elements that the obligation must meet to qualify as an exception under the BAPCPA.
Legal Definition of Domestic Support Obligations
- the payee of the obligation is either a governmental unit or a person with a particular relationship to the debtor or to the child of the debtor
- the nature of the obligation must be support
- the source of the obligation must be an agreement, court order, or other determination
- the assignment status must be consistent with Paragraph (D).
Non-Debtor Spouses Given Priority Over Most Other Creditors
In bankruptcy, non-debtor spouses who have met these requirements are given priority over most creditors when it comes to debt collection. Furthermore, these individuals’ claims are deemed non-dischargeable under both Chapter 7 and Chapter 13 of the Bankruptcy Code. The non-discharge-ability of these claims is dependant on whether the obligation is found to be “in the nature of support.” Federal bankruptcy law determines whether an obligation meets this particular standard.
A Few Factors Considered in Determining Nature of Support
- Is the obligation is assumed?
- What are the terms of a final divorce decree?
- What is the earning potential of each party?
- Is the obligation is considered rehabilitative to one spouse?
- Is the obligation is subject to a contingency such as remarriage?
- Are minor children are in need of support?
These are just some of the items the court may consider, among others.
Consider Implications of Bankruptcy on Divorce and Support Obligations
As divorce and bankruptcy filings are often intertwined, parties must understand the consequences that come along with opting to file for bankruptcy. It is particularly important to understand the relationship between bankruptcy filings and the obligation of a debtor to continue to meet their Domestic Support Obligations pursuant to the Bankruptcy Code. Such obligations are considered non-dischargeable debts in Chapter 7 and Chapter 13 bankruptcy proceedings.
Questions? Robert E. Hornberger, Esq. PC Can Help
The Nassau County and Suffolk Count Divorce Attorneys of Hornberger Verbitsky, P.C. have a great deal of experience representing both sides during a divorce with bankruptcy and have strong relationships with bankruptcy attorneys who deal with bankruptcy on a daily basis with whom we consult. If you have questions about your or your spouse’s bankruptcy and how that will affect your divorce, child support or spousal support, please give us a call at 631-923-1910 or fill out the short form on this page for a complimentary consultation and we’ll be happy to help.