If you are contemplating filing for bankruptcy at the same time you are filing for divorce, there are some things you need to know. You will need to consult with both a family law and a bankruptcy attorney, but here are some basics.
THE AUTOMATIC STAY
Although filing a bankruptcy case creates an automatic stay of all actions against the debtor, the automatic stay does not stop the commencement or continuation of a civil action for:
- Establishment of paternity;
- Establishment or modification of a Domestic Support Obligation (DSO);
- Proceedings concerning child support or visitation;
- Dissolution of marriage (except that such proceeding seeks to determine the division of property that is property of the estate);
- Proceedings regarding Domestic Violence;
- Proceedings regarding collection of DSO from property that is not property of the estate; or
- Withholding income that is property of the bankruptcy estate or property of a debtor for payment of DSO under judicial administrative order or a statute.
PROPERTY OF THE BANKRUPTCY ESTATE
It may be in your best interest to complete the divorce prior to filing the bankruptcy or vice-versa, depending on the facts particular to your case. Property of the bankruptcy estate includes all legal and equitable interests of the debtor in property, including all interest of the debtor and the debtor’s spouse in Community Property that is under their sole, equal or joint management or control or liable for an allowable claim against the debtor. If the Community Property is not divided before a party to a dissolution files a bankruptcy petition, all of the Community Property becomes property of the Bankruptcy estate.
This can have a disastrous effect on the non-filing spouse, such as in In re Mantle (9th Cir 1998) 153 F.3d 1082. In Mantle, the parties had sold their home and placed the funds in escrow. While the funds were in escrow, the husband filed bankruptcy. That trustee treated all the funds, including wife’s portion, as property of the bankruptcy estate. This case illustrates the importance of having both a family law and a bankruptcy lawyer.
SPOUSAL AND CHILD SUPPORT (DOMESTIC SUPPORT OBLIGATION (DSO))
Bankruptcy Court labels family support, child support and/or spousal support as a Domestic Support Obligation (DSO). A DSO is a debt owed to a spouse, former spouse, or child of debtor or such child’s parent, legal guardian or responsible relative, or a governmental unit. A DSO will not include an equalization payment or division of property.
DSOs – CHAPTER 7 BANKRUPCTY VS. CHAPTER 13
Although a DSO is non-dischargeable in either a Chapter 7 or a Chapter 13 bankruptcy, non DSO family law obligations are treated differently.
DSOs have a very high priority when a Chapter 7 trustee disburses funds to creditors. DSOs are non-dischargeable in Chapter 7 Bankruptcy. Family law obligations other than DSOs are also non-dischargeable in Chapter 7 Bankruptcy. DSOs are also non-dischargeable in a Chapter 13 Bankruptcy, and a Chapter 13 plan will not even be approved if the debtor is delinquent on a DSO. However, it is very important to know that non DSO family law obligations are dischargeable in a Chapter 13 bankruptcy.
This is just some basic information if you are contemplating filing for bankruptcy and have a pending family law matter. If you would like to learn more about the impact filing for bankruptcy will have on your family law proceeding, please contact Christina Sherman at (415) 457-4367 to schedule a consultation.