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DIVORCE (INCLUDING DSO) AND BANKRUPTCY (ARIZONA SPECIFIC)

IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO.  WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.

“The dissolution decree’s apportioning of the community debts is usually accompanied by a hold-harmless provision: the spouse to whom a particular debt is assigned will hold the other spouse harmless for that debt. The assigned spouse is obliged to pay the particular debt, and, in the event that the debt is not paid, the other spouse can pay that debt and seek recovery of that debt from the non-paying spouse. In a Chapter 7 bankruptcy, the non-paying former spouse can discharge that obligation to pay the creditor, but he or she cannot discharge the hold-harmless provision and the potential obligation to repay the other former spouse.”  from Gary R. Stickell’s website
Gary R. Stickell, Attorney at Law, P.C


Possible language for divorce decree as related to bankruptcy:

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.  or

There is no division of debts.  Each of the parties anticipate filing bankruptcy and discharging the unsecured debts of the marriage.

In re Cooke (Fiebelkorn v Cooke), 3:19-bk-10014-DPC (Chapter 13, 6/16/20) Divorce settlement – parties agreed to transfer Cooke title to marital home, then Cooks to refinance and pay Fiebelkorn half of profit. Refinance not done, Cooke filed 13, attempting to discharge obligation.  Fiebelkorn alleges embezzlement.  Court found debt dischargeable re Section 523(A)(2)(a).

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.

Over-payment for daycare assistance and food stamps – is that DSO?

In re Dennis and In re Halbert. No. 18-2988 & 18-2952 (7th Circuit 6/27/19).   Debtor Dennis filed a Chapter 13.   The Illinois Department of Human Services (DHS) filed a priority claim on the basis that the overpayment of daycare assistance was a DSO.   Debtor Halbert filed a Chapter 7 and sought the turnover of an intercepted tax refund.  DHS claimed that Debtor was illegible for food assistance and claimed in the defense to the turnover action that it was for a DSO.   The definition of DSO under 101(14A)(B) includes “support” provided by a governmental unit.  DHS claimed these benefits were for minor children and hence support.   The Court found that the debts were not in the nature of support, but rather the money was for benefits paid to the Debtors to which the Debtors were not entitled.  The Court referenced the cases were a parent overpays for support; those Court have held such an overpayment is not a DSO.  The 7th found of the payment of these benefits to which the Debtors were not entitled were not DSOs.


Issue: is judgment for attorneys fees = DSO and not dischargeable in chapter 13?

In re Hurst 2:18-BK-03882-DPC, Adv 2:18-ap-00282-DPC (5/24/19) Before this Court are a Motion and Counter-Motion for Summary Judgment to determine whether a state court judgment for attorneys’ fees is a domestic support obligation (“DSO”). Kimberly Lauren Hurst (“Ms. Hurst”) holds a judgment (“Judgment”) against Aaron Joseph Hurst (“Debtor”) arising from a divorce case #FC2014-009478 (“Divorce Case”) in the Superior Court of Arizona, Maricopa County (“State Court”). Ms. Hurst contends the Judgment is a DSO. Debtor contends the Judgment should not be treated as a DSO and is therefore dischargeable.
This Court now finds that, under the facts of this case, the Judgment is a DSO within the meaning of 11 U.S.C. § 101(14A). The Judgment is non-dischargeable under § 523(a)(5).


Funds subject to constructive trust:

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.

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 In re 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 (9th Cir 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.

The intersection of divorce and bankruptcy:

In re Kiley, 15-27838 (Bankr. D. Utah Dec. 4, 2018) Absent a rollover into an account that might be exempt, Section 541(a)(5)(B) came into play. That section brings property into the estate that the debtor receives within 180 days of bankruptcy as a result of a property settlement or divorce decree.

Divorce decree does not control obligation to pay student loan

In re Carrion, Jr. (U.S. Department of Education v. Carlos Carrion, Jr.) 9th Cir BAP, No. SC-18-1234-FBKu (5/31/19) Debtor remained liable for the entire amount of his own educational loan debt even though he agreed to a 50-50 division of the debt with his ex-wife in their marital settlement agreement. Bankruptcy court misapplied California law, reverse and remand.

In re Jennings, 2:18-bk-11759-DPC, 9/23/19.  Trustee’s Objection to Claimed Exemption Debtor’s interest in ex-spouse’s deferred compensation.
After reviewing the parties’ briefs and hearing oral argument on the issue, this Court finds that the relevant marital settlement agreement created an interest for Debtor in her ex-husband’s deferred compensation plan and that the Debtor’s interest in the deferred compensation plan is exempt under applicable Arizona law. The Trustee’s Objection is overruled and Trustee’s Sale Motion is denied.