Divorce and Bankruptcy
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Language for divorce decree: Wife (Husband) intends to file bankruptcy. Therefore no debts are allocated to wife and therefore wife is not ordered to hold harmless husband (wife) regarding any debt.
Heilman v. Heilman (In re Heilman) BAP No. EW-09-1150-HMoPa, 430 B.R. 213; 2010 Bankr. LEXIS 1386 (9th Cir BAP, April 26, 2010) The bankruptcy appellate panel held, however, that the community debt was a pre-petition debt which was discharged in the debtor’s bankruptcy case, and the hold-harmless provision in the divorce decree did not revive the discharged debt. On the date of the debtor’s bankruptcy petition the spouse held a contingent claim against the debtor for contribution on the community loan debt, and the debtor’s discharge extinguished the debtor’s liability on the contingent liability. Further, the hold-harmless provision was based on the debt which was discharged and thus did not constitute a reaffirmation of the debt, and the provision of the divorce decree requiring the debtor to pay the debt was void and unenforceable.
Mele vs Mele, BAP No. WW-13-1173-DTaKu, Bk. No. 11-24015-MLB, Adv. No. 12-01271-MLB (9th Cir.11/5/2013) “While the bankruptcy court’s decision to except a portion of the Property Settlement Judgment from John’s chapter 13 discharge pursuant to § 523(a)(4) as a defalcation of his fiduciary duties to the marital community between him and Kimberly may be defensible as a matter of policy, it appears “to override the balance Congress struck in crafting the appropriate discharge exceptions for Chapter 7 and Chapter 13 debtors.” Davenport, 495 U.S. at 563.”
“Based on the foregoing analysis and discussion of § 523(a)(4) and relevant authorities, we conclude that the bankruptcy court erred as a matter of law in determining that Washington common law established the marital relationship as in the nature of an express or technical trust, imposing fiduciary duties on spouses to manage community property for the benefit of the marital community during marriage, for purposes of establishing the elements of a § 523(a)(4) claim. Accordingly, we REVERSE.”
Adam v. Dobin (In re Adam; 9TH CIR.) BAP CC20-14-1416-PaKiTa (4/6/15) Affirming the bankruptcy court, the Bankruptcy Appellate Panel of the Ninth Circuit held that the bankruptcy court did not err in granting summary judgment that the creditor’s claim against the debtor was excepted from discharge under Sect. 523(a)(15). The BAP reasoned that the trend in recent case law was to construe Sect. 523(a)(15) expansively to cover a broader array of claims related to domestic relations within the discharge exception. In sum, the trend in recent case law is to construe § 523(a)(15) expansively to cover a broader array of claims related to domestic relations within the discharge exception. See, e.g., In re Wise, 2012 WL 5399075, at *6 (Bankr. E.D. Tex. Nov. 5, 2012) (§ 523(a)(15) “rendered as non-dischargeable virtually all obligations arising between spouses as a result of a divorce decree.”); Quarterman v. Quarterman (In re Quarterman), 2012 Bankr. LEXIS 4924, at * 9-10 (Bankr. D. Ariz. October 17,
2012) (“The Section is not limited to simply divorce decree judgments alone but excepts any debt incurred by the debtor in the course of divorce or any debt in connection with a divorce decree.”).
In re Ginzl, (Bkrtcy.M.D.Fla.) July 6, 2010: Discharge – Obligations imposed by marital settlement agreement were nondischargeable. Obligations which a Chapter 7 debtor incurred prepetition in connection with his divorce, pursuant to the terms of a marital settlement agreement signed by the parties and incorporated into a final judgment of divorce, consisting of the debtor’s obligation to his ex-wife for permanent periodic alimony, for a lump sum payment from anticipated proceeds of the sale of marital property, for the assumption and payment of mortgages and homeowners’ association dues, for the payment of a deficiency on a joint income tax return, and for payment of reasonable attorney fees that the ex-wife incurred in enforcing his obligations under the marital settlement agreement, were nondischargeable, as domestic support obligations or obligation incurred in connection with his divorce that were not support. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) eliminated the distinction between domestic support obligations and other obligations arising from divorce.
Child support, alimony, property settlement: Sections 523(a)(15) and 1328(a) or (b): What is and is not dischargeable? There are two issues involved. The first is whether the divorce decree provision can be considered “in the nature of” alimony or child support. That includes actually-specified alimony and child support along with anything that operates as a substitute for or supplement to alimony or child support. If the obligation fits that category, it would be considered non-dischargeable. Conversely, if the provision operates as a division of property or debt, it is generally not considered alimony/support, and it could be dischargeable under the right circumstances. There are situations where a division of debt is so one-sided that the party that benefits could be considered to receive alimony/support, e.g. where a custodial parent is not working. In that case, the relief from paying debts allows that party to free up resources to support the children, i.e., operating in the nature of alimony/child support. First, look at the decree. If it addresses dividing debts and assets in a completely separate section from the provision on the award of alimony/support, it is more likely, though not necessarily certain, to be considered division of debt or property which is potentially dischargeable. It’s really a case-by-case situation.
The second issue is what type of bankruptcy is filed? If it is a Chapter 7, then even a division of property or debt obligation to hold the ex- harmless would not be discharged because of Section 523(a)(15). If the debtor files Chapter 13 and gets a general discharge under 1328(a), then an obligation to divide property or debt (that is not “in the nature of” alimony/support) would be dischargeable because 523(a)(15) doesn’t apply to a 1328(a) general discharge. However, it does still apply to a 1328(b) hardship discharge. Thanks to Darrell Ihns.
In re Pardee, (Bkrtcy.N.D.Okla.) July 22, 2010: Bankruptcy Estate – Funds that were subject to constructive trust could not be claimed as exempt by debtor with respect to trust beneficiary. Funds which were being held in a Chapter 7 debtor’s individual retirement account (IRA), but which were subject to a constructive trust imposed by a state-court order in favor of the former wife of the debtor’s deceased husband, were not bankruptcy estate property. Thus, the funds could not be claimed as exempt by the debtor with respect to the former wife’s interest in the fund.
A. Each spouse has the sole management, control and disposition rights of each spouse’s separate property.
B. The spouses have equal management, control and disposition rights over their community property and have equal power to bind the community.
C. Either spouse separately may acquire, manage, control or dispose of community property or bind the community, except that joinder of both spouses is required in any of the following cases:
1. Any transaction for the acquisition, disposition or encumbrance of an interest in real property other than an unpatented mining claim or a lease of less than one year.
2. Any transaction of guaranty, indemnity or suretyship.
3. To bind the community, irrespective of any person’s intent with respect to that binder, after service of a petition for dissolution of marriage, legal separation or annulment if the petition results in a decree of dissolution of marriage, legal separation or annulment.
25-215. Liability of community property and separate property for community and separate debts
A. The separate property of a spouse shall not be liable for the separate debts or obligations of the other spouse, absent agreement of the property owner to the contrary.
B. The community property is liable for the premarital separate debts or other liabilities of a spouse, incurred after September 1, 1973 but only to the extent of the value of that spouse’s contribution to the community property which would have been such spouse’s separate property if single.
C. The community property is liable for a spouse’s debts incurred outside of this state during the marriage which would have been community debts if incurred in this state.
D. Except as prohibited in section 25-214, either spouse may contract debts and otherwise act for the benefit of the community. In an action on such a debt or obligation the spouses shall be sued jointly and the debt or obligation shall be satisfied: first, from the community property, and second, from the separate property of the spouse contracting the debt or obligation.
Filing bankruptcy for one spouse and not the other: Discharge of the marital community and discharge of the non-filing spouse assuming that they are both married at the time of incurring of the debt and the filing the petition.
Example one: A Debtor incurs debt as a separate and community obligation. If Debtor files bankruptcy and the non-debtor is not included, the Discharge will discharge the obligation for the Debtor and the marital community; because the non-debtor did not incur the debt, there is no obligation for non-debtor and his separate property.
Example two: If the Non-Debtor incurs the debt, the community is obliged as is the Non-Debtor. Debtor files a Bankruptcy, the 524 Community Discharge discharges the community obligation. Non-Debtor’s separate obligation is not discharged. However, the Creditor can pursue only the non-debtor’s separate property. The non-debtor’s contribution to the community is not subject to collection because that portion is only subject to collection if the debt is from prior to the marriage under ARS 25-215 (B). In general, see ARS 25-215.
Warning: If the event that the divorce happens, the debts are no longer community debts but joint debts and the 524 Community Discharge is inapplicable. See Frazier v. Goldberg (Ariz. Ct App)
Subsection (a) of 11 U.S.C. §524 addresses the split discharge, when only one spouse attains a discharge in bankruptcy, in community property states. The legislative history of this section says that “if community property was in the [bankruptcy] estate and community claims were discharged, the discharge is effective against the community creditors of the non-debtor spouse as well as of the debtor spouse. House Report No. 95-595, 95th Cong., 1st Sess. 365-6 (1977), Senate Report No. 95-989, 95th Cong., 2d Sess. 80 (1978). § 524(a)(3) treats the effect on the non-debtor spouse of a discharge of a debtor in a community property state when the non-debtor spouse is liable on the community claim, but has not filed a bankruptcy petition. That is, if one spouse in a community property state has commenced a bankruptcy case where, as here, no claim is excepted from the debtor’s discharge and is not otherwise found to be nondischargeable, and if the non-debtor spouse would not have had a claim excepted from her discharge in a hypothetical case commenced on the same day as the commencement of the debtor’s case, then the creditors of either spouse holding community claims on the date of bankruptcy are thereafter barred from asserting claims against after acquired community property. It was the duty of the scheduled creditors in the Braden Jay Karber bankruptcy proceedings to object to the hypothetical discharge of Valerie Karber, as the non-debtor spouse, within the same time limits as their objections to the discharge of Braden Jay Karber. 11 U.S.C. § 524(b). No such objections were filed and thus all community creditors before the Court in that case are now barred from seeking to collect their deficiencies from the after acquired community property of either Braden Jay Karber or Valerie Karber. In re Karber 25 B.R. 9, 12 (Bkrtcy.Tex.,1982); See also In re Dyson 277 B.R. 84 (Bkrtcy.M.D.La.,2002) – note not 9th Circuit decisions.
Subsection (a) of 11 U.S.C. §524 addresses the split discharge, when only one spouse attains a discharge in bankruptcy, in community property states. The legislative history of this section says that “if community property was in the [bankruptcy] estate and community claims were discharged, the discharge is effective against the community creditors of the nondebtor spouse as well as of the debtor spouse. House Report No. 95-595, 95th Cong., 1st Sess. 365-6 (1977), Senate Report No. 95-989, 95th Cong., 2d Sess. 80 (1978). § 524(a)(3) treats the effect on the nondebtor spouse of a discharge of a debtor in a community property state when the nondebtor spouse is liable on the community claim, but has not filed a bankruptcy petition. That is, if one spouse in a community property state has commenced a bankruptcy case where, as here, no claim is excepted from the debtor’s discharge and is not otherwise found to be nondischargeable, and if the nondebtor spouse would not have had a claim excepted from her discharge in a hypothetical case commenced on the same day as the commencement of the debtor’s case, then the creditors of either spouse holding community claims on the date of bankruptcy are thereafter barred from asserting claims against after acquired community property. It was the duty of the scheduled creditors in the Braden Jay Karber bankruptcy proceedings to object to the hypothetical discharge of Valerie Karber, as the nondebtor spouse, within the same time limits as their objections to the discharge of Braden Jay Karber. 11 U.S.C. § 524(b). No such objections were filed and thus all community creditors before the Court in that case are now barred from seeking to collect their deficiencies from the after acquired community property of either Braden Jay Karber or Valerie Karber. In re Karber 25 B.R. 9, 12 (Bkrtcy.Tex.,1982) See also In re Dyson 277 B.R. 84 (Bkrtcy.M.D.La.,2002)
VERY IMPORTANT: The community discharge terminates upon divorce, among other reasons. The marital community continues as long as the husband and wife remain married, neither dies, and they live in a community property state. In re Kimmel, 378 B.R. 630 (9th Cir. BAP 2007); Burman v. Homan (In re Homan), 112 B.R. 356, 360 (9th Cir. BAP 1989). Under Arizona law, the marital community ends upon divorce and the community debts become joint debts – Community Guardian Bank v. Hamlin, 182 Ariz. 627, 898 P.2d 1005 (App. 1995)(This case did not involve bankruptcy.)
As commentators have stated: …the Devil himself could effectively receive a discharge in bankruptcy if he were married to Snow White. If [the Devil] does not treat her better than his creditors, [Snow White] will, by divorcing him, deny his discharge. In re Kimmel, 378 B.R. 630 (9th Cir. BAP 2007)
Birt vs Birt, 1 CA-CV 03-0258 (Az Ct App Div 1, 8/12/04) Appellant Judith M. Birt (“Wife”) appeals from the trial court’s denial of her motion to set aside the decree of dissolution of her marriage to Appellee John Mark Birt (“Husband”). We hold that when a party to a dissolution action files a petition in bankruptcy shortly after entry of the decree to avoid the decree’s effect on allocation of community debts and such discharge may significantly affect the non-discharged spouse’s qualification for spousal maintenance, child support and the equitable division of community property, the trial court should vacate those portions of the decree pursuant to Arizona Rule of Civil Procedure 60(c)(6)(“Rule 60(c)(6)”) so it can provide relief to the non-discharged spouse. Based on the record presented here, the superior court erred when it denied Wife’s motion. We reverse that order and remand for further proceedings consistent with this decision.
: In re Beverly , 374 B.R. 221 (9th Cir.BAP 2007) affirmed in part, dismissed in part by Inre Beverly, 551 F.3d 1092 (9th Cir. 2008). BAP reversed the Bankruptcy Court by finding that Debtor and his former wife committed fraudulent transfers. Their divorce decree awarded the debt to the future Bankrupt while the former wife got all of the non-exempt property. The non-exempt property would have been enough to satisfy all of the debt. Contrast with In re Bledsoe,569 F. 3d 1106 (9thCir 2009) where the Court of Appeals found that the mere allegation that the property settlement of divorce decree did fairly divide property was insufficient under §548 without proof of actual fraud.
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