Divorce and Bankruptcy: When The Ex-Spouse Files For Chapter 7 Bankruptcy, What to Do?

Posted by on Jan 13, 2012 in Divorce and Bankruptcy | 8 comments

Bankruptcy and Divorce are often suprisingly related.  Oftentimes, when spouses divorce, one spouse will file bankruptcy – this is typically the spouse who either earns no direct income or qualifies for chapter 7 bankruptcy based on his/her separate income.

Typically speaking, domestic support obligations such as alimony and child support are not dischargeable under 11 USC 523(a)(8) of the bankruptcy code – this means the spouse who files bankruptcy can’t simply file a chapter 7 case and get rid of those financial responsibilities.

Additionally, § 523(a)(15) states that martial property settlements are non-dischargeable in a chapter 7 bankruptcy case.  In fact, § 523(a)(15) can be raised in a nonbankruptcy case after the bankruptcy case is concluded, such as the family law court.  Equalization payments fall under this categorization and oftentimes bankruptcy courts will defer the matter to family law courts for further review if the matter is at issue.

In Heilman (Heilman v. Heilman (In re Heilman), 430 B.R. 213 (B.A.P. 9th Cir. 2010)), , the 9th Circuit BAP created what is considered a minority position across the country when it decided that a Hold Harmless agreement relating to pre-petition community debt was a non-enforceable obligation against the debtor-spouse where the debtor-spouse
had individually filed and completed a successful chapter 7 bankruptcy approximately six months before divorce proceedings began with his wife.  Because the BAP determined the chapter 7 bankruptcy discharged the debtor-spouse’s underlying liability as to any community debt that existed before the filing of the bankruptcy, the provisions in the divorce decree regarding the community debt including the Hold Harmless provision were deemed unenforceable even though those provisions were drafted after the debtor-spouse’s bankruptcy case was concluded.

Of critical importance, however, the 9th Circuit BAP clarified that the applicability of 11 U.S.C. § 523(a)(15) is enforceable against a debtor where the debt is incurred “in the course of a divorce or separation.”  The Heilman court continued that had the divorce or separation already been “in progress” prior to the filing of the bankruptcy, the Hold Harmless provision of the Dissolution Decree would have been enforceable against the debtor post-petition in cases where § 523(a)(15) could be applied.  Accordingly, the 9th Circuit BAP held that the Heilman case was one based “exclusively on timing.”

When the worlds of divorce and bankruptcy collide, it is important to seek out both family law and bankruptcy attorneys.  Oftentimes, attorneys in one field will have colleagues in the other.   It is therefore criticial to consult with attorneys early in the process so that you are well aware of your legal options.

 

8 Responses to “Divorce and Bankruptcy: When The Ex-Spouse Files For Chapter 7 Bankruptcy, What to Do?”

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