A new bankruptcy law, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the Act), was recently passed into law and became effective on October 17, 2005. The new law has a dramatic effect on many aspects of bankruptcy, and also impacts family law proceedings in a number of different areas. This article will highlight the areas where the new law provides changes that impact family law proceedings.
Chapter 7 Bankruptcies - Dischargeability of Debts
Perhaps the most common situation is where a bankruptcy follows a divorce. When an individual files for bankruptcy, his or her primary goal is to obtain a discharge from debts. Previously, the law at 11 U.S.C. §523(a)(5) provided that obligations such as child support and maintenance were not dischargeable in bankruptcy because they were “in the nature of support.” This section was amended by the Act to state that “domestic support obligations” are not dischargeable in bankruptcy. Since there is no legislative history to the new legislation, we cannot know exactly the intentions of the drafters, but it appears that this language is somewhat broader than the previous language.
Under the old law, an obligation clearly designated as child support or maintenance under a dissolution judgment was not dischargeable in bankruptcy, and no further action was needed. However, for any obligations that were questionable, the person to whom the obligation was owed was required to get a court determination. Under the new law, until court cases have begun to interpret this language, it appears to be a wise policy to file an adversary complaint in the bankruptcy court to get a court determination if there is any question about the “domestic support obligation.”
Dischargeability of Property Settlements and Debts
Under the old law, property settlement obligations and obligations to pay for debts were generally dischargeable in bankruptcy. One section of the old bankruptcy law, 11 U.S.C. §523(a)(15), provided a mechanism to challenge the dischargeability of property settlements contained in dissolution judgments. Under this section, obligations were dischargeable unless (a) the debtor did not have the ability to pay the debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor and, if the debtor was engaged in a business, for the payment of expenditures necessary for the continuation, preservation and operation of the business, or (b) discharging the debt resulted in a benefit to the debtor that outweighed the detrimental consequences to a spouse, former spouse, or child of the debtor. This section provided a type of balancing test for the court to utilize in these situations.
This section, 11 U.S.C. §523(a)(15), was changed by the Act to state that any obligation to a spouse, former spouse, or child of the debtor and not of the kind described in §523(a)(5) (“domestic support obligations”), that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court or record, or a determination made in accordance with state or territorial law by a government unit is NOT DISCHARGEABLE.
This is a very dramatic change which, in effect, states that any obligations coming from a dissolution judgment or separation agreement are not dischargeable in bankruptcy.
It is not clear at this point whether some affirmative action would need to be filed in the bankruptcy court in this situation, but that would seem to be the wisest choice until cases have been decided interpreting this new section of the law.
This new section, 11 U.S.C. §523 (a)(15), applies not only to property settlement obligations in dissolution judgments, but would also apply to obligations to pay for debts contained in dissolution judgments. This section would not prohibit the debtor from obtaining a discharge of the debt from the perspective of the creditor, but appears to prohibit the debtor from discharging any indemnification or hold harmless provision provided in the dissolution judgment involving the former spouse.
The balancing test previously provided in 11 U.S.C. §523(a)(15) has been deleted.
The Automatic Stay of the Bankruptcy Court
The filing of a bankruptcy case stops actions against the person filing for bankruptcy by operation of the automatic stay of the bankruptcy. The automatic stay, 11 U.S.C. §362, serves as an injunction of any judicial proceedings. The automatic stay is effective upon filing either a Chapter 7 or a Chapter 13 bankruptcy.
Under the old law, the automatic stay applied to most family-related proceedings that were pending at the time the bankruptcy was filed. The automatic stay not only stopped pending proceedings, but also prevented commencement of new actions against the debtor without bankruptcy court approval.
The new law amended 11 U.S.C. §362 to add more exceptions to the automatic stay in family law proceedings. The new section states that filing bankruptcy does NOT operate as a stay for the commencement or continuation of civil action or proceedings:
a. for the establishment of paternity.
b. for the establishment or modification of an order for domestic support obligations.
c. concerning child custody or visitation.
d. for the dissolution of marriage, except to the extent that such proceeding seeks to determine the division of property that is the property of the bankruptcy estate.
e. regarding domestic violence.
f. for collection of a domestic support obligation from property that is not property of the estate.
g. for withholding of income that is property of the estate for payment of a domestic support obligation under a judicial or administrative order or statute.
h. reporting overdue support owed by a parent to any consumer reporting agency.
i. interception of a tax refund for collection of child support.
j. withholding, suspension or restriction of a driver’s license for collection of child support.
k. enforcement of a medical obligation as specified under the Social Security Act.
The list above is a substantial increase in the types of proceedings that are not stopped by the filing of a bankruptcy case.
Even if the family law proceeding is stopped by the filing of a bankruptcy, a person can make a request to the bankruptcy court to lift the automatic stay. 11 U.S.C. §362(d). This is done by motion filed in the bankruptcy court; a court date must be scheduled within thirty (30) days. Orders to lift the automatic stay are commonly granted to proceed with divorce cases.
Chapter 13 Bankruptcies
A Chapter 13 bankruptcy is an individual reorganization plan, and proposes a plan for modification of debt and/or repayment of debts over a period of years. Debts not paid in full under the plan are discharged. A Chapter 13 bankruptcy case can be filed by an individual who has unsecured debts of less than $307,675 and secured debts of less than $922,975.
After a divorce with adverse financial consequences, a Chapter 13 bankruptcy is sometimes an alternative. For an individual with property that would otherwise be lost to a bankruptcy trustee in a Chapter 7 bankruptcy, a Chapter 13 bankruptcy is a more attractive alternative because after the confirmation of the Chapter 13 plan, the property of the debtor can continue to be vested in the hands of the debtor.
As stated above, under the new provisions of 11 U.S.C. §523(a)(5), any “domestic support obligations” are not dischargeable in bankruptcy; however, obligations for property settlements and obligations for debts under a dissolution judgment can be put into a Chapter 13 bankruptcy plan.
The new bankruptcy law has amended several sections affecting Chapter 13 bankruptcies:
a. 11 U.S.C. §1307(c) was amended to state that the failure to pay post-petition domestic support obligations is a basis to dismiss the Chapter 13 case or convert it to a Chapter 7 case.
b. 11 U.S.C. §1325(a)(8) was amended to provide that a plan would not be confirmed unless the debtor was current in payments of any post-petition domestic support obligations. This section also states that a discharge will not be granted until a debtor who owes such obligations certifies that they are current. Failure to do so is grounds for dismissal of the Chapter 13 case or conversion to a Chapter 7 case. 11 U.S.C. §1307(c)(11).
c. 11 U.S.C. §1328 was amended to state that a Chapter 13 discharge is now conditioned on the debtor being current on all post-petition domestic support obligations and pre-petition domestic support obligations to the extent that payment was provided for in the debtor’s confirmed plan.
It certainly appears that the enactment of these amendments has the effect of putting additional restrictions on debtors filing for Chapter 13 bankruptcies and making stricter provisions for payment of obligations coming from dissolution judgments.
Conclusion
The new bankruptcy law was effective October 17, 2005 and very few cases have been filed so far under the new law. No court cases have been decided under the Act, but its effect is dramatic. It will be important to watch the decisions of the bankruptcy courts around the state to see how the new law is interpreted.
