When Bankruptcy Meets Divorce

Just over two years ago, President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, which became effective Oct. 17, 2005. If you are getting divorced, this new bankruptcy law could concern you. Reason: While you may not realize it, in this country, our high divorce rate and bankruptcy commonly intersect.

Here’s how. Until the enactment of the BAPCPA, the bankruptcy process was seen by some, and used by many, as a tool to permanently evade (or, to use bankruptcy terminology, ‘discharge’) family obligations foisted upon them by agreement or court order after a marital dissolution. Plus, once a person filed a bankruptcy petition--for liquidation under Chapter 7 or reorganization under Chapter 13 (or, less commonly, Chapter 11)--he gained the protection of an ‘automatic stay,’ preventing creditors from taking any actions against him, his income or his property to collect their debts.

Perhaps even more important than the means test and mandatory financial management education is the fact that BAPCPA has made it much more difficult for debtors to shirk domestic relations responsibilities. Unlike the old law (BRA) which, as amended in 1984, allowed debtors to discharge nonsecured property settlement obligations to former spouses (think payouts for businesses, professional practices, or other assets distributed in a divorce), the new law forbids this. Now, any domestic support obligation ‘DSO’ becomes a ‘first priority claim,’ ineligible for discharge.'

Still, scholars see potential areas of abuse. If you have a property agreement or divorce decree wherein your ex assumes existing marital debt (outstanding credit cards run up during your marriage) and agrees to pay the credit card companies directly--‘holding you harmless’ in the meantime--beware. That obligation might be subject to discharge or reduced payment under the new bankruptcy law. Why? Payments made to a third party, i.e., someone other than, ‘a spouse, former spouse or child of the debtor’ might not receive protection under the new 11 U.S.C. 523(a) (15).

On the other hand, any obligation undertaken in a divorce, owed to a third party and in the nature of support (say, an ongoing mortgage or auto loan) is probably safe from discharge under BAPCPA. Best idea: Insist on having your spouse pay old, nonsecured consumer debt, directly, from his--or her--share of money received from the sale of a house or distribution of other assets at the time of the divorce. A promise to pay is nice, but security (or cash) is king.

BAPCPA also provides ‘domestic support obligations’ first priority status over other nonsecured debt. (But, this fact might not be as useful as it sounds as BAPCPA expands the reach and strength of secured creditors. So, it’s possible less will be left for all unsecured creditors, regardless of priority status.) Furthermore, the automatic stay provisions of the code no longer apply to divorce or support actions filed in state courts. Though you won’t be able to divide the debtor’s property, you will be able to address support, domestic violence and custody matters without having to appear in federal bankruptcy court to ‘lift’ the stay.

Also, under BAPCPA, a bankruptcy filing won’t affect your rights to receive support via wage garnishment or other common collection means. Likewise, pre-filing payments of domestic support obligations to a spouse (so-called ‘pre-petition transfers’) won’t be ‘voidable’ as preferential payments. Plus, per BAPCPA, no payment plan debtor will receive an order of discharge until he or she confirms that all domestic support obligations are current.

What’s more, BAPCPA requires a debtor to reside in a state more than 40 months before he or she files for bankruptcy protection to take advantage of that state’s exemptions; thus eliminating ‘forum shopping,’ where debtors moved to states like Florida or Texas just before filing bankruptcy petitions, in an effort to convert nonexempt property into an exempt homestead, wiping out their nonsecured debt in the process.

So much for the debtor. As a DSO creditor in the age of BAPCPA, you will receive notice from the trustee of your rights to collect support through federal enforcement agencies. You will also receive the most recent address of the debtor, where he works and details about other affirmed creditors remaining after the bankruptcy action.

While BAPCPA can make life more difficult for those who have suffered from sudden unemployment, sickness or other misfortune, it’s probably the best thing to have happened to unsecured divorce creditors since 1898. Still, BAPCPA is recent law and courts have yet to settle all the issues arising from its new provisions. If your ex files for bankruptcy protection, consult with an expert. Ask how to protect your DSO (domestic support obligation) creditor’s rights by filing any necessary adversary complaints or proofs of claims. For instance, under a Chapter 13 plan, a debtor can still escape paying some, or all, accumulated support arrears, so you must be vigilant.

And, don’t forget to obtain copies of all the debtor’s bankruptcy schedules (disclosing his income, real and personal property, and the like). As BAPCPA provides the possibility of using exempt property to collect what you are owed as a nondischarged creditor, these schedules will be a rich source of useful information. Happy hunting.

Read more at Forbes.com

Source for Post: Forbes.com