Bankruptcy and Divorce. How does Bankruptcy Impact Divorce and Child Support

Tenants by the Entireties may be protecting equity in your house.  When you divorce, your real estate is no longer protected by the T by E exemption.  Therefore, you may be bettter off filing for bankruptcy before getting divorced.  In addition, all parties will have more disposabable if the bankruptcy occurs before the divorce.

The three debts at issue are non-dischargeable because each is a domestic support obligation that specifically exempted from discharge. A domestic support obligation is defined at 11 U.S.C. §101(14A) as: A debt . . . that is– (A) owed to or recoverable by– (i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or (ii) a governmental unit; (B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated; (C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of– (i) a separation agreement, divorce decree, or property settlement agreement; (ii) an order of a court of record; or (iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and (D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt. A domestic support obligation is exempted from discharge pursuant to 11 U.S.C.§523(a)(5). Whether the obligation is in the nature of alimony, maintenance or support depends on the intent of the parties. Tilley v. Jessee, 789 F.2d 1074, 1078 (4th Cir. 1986); In re Mirea, WL3042239, p. 6 (Bkrtcy.E.D.Va 2012). In making the determination, the court will look upon the following factors: (1) the language and substance of the agreement; (2) the financial situation of the parties at the time of the agreement; (3) the function served by the obligation at the time of the agreement; and (4) whether there is any evidence of overbearing at the time of the agreement. Catron v. Catron, 164 B.R. 912, 919 (E.D. Va. 1994); In re Mirea, WL3042239, p. 6. Even if the Court finds that the debts at issue do not fall within the definition of a domestic support obligation (which they do) to be exempted under §523(a)(5), they each certainly fall within the purview of 11 U.S.C.§523(a)(15). In 2005, Congress made other debts owed directly to a spouse, former spouse, or child of the debtor non-dischargeable. See 11 U.S.C.§523(a)(15). Specifically, 11 U.S.C.§523(a)(15) makes the following debts nondischargeable: “[debt] to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit.” 11 U.S.C.§523(a)(15).

The ability of a debtor to pay is not a factor in analyzing whether a debt is exempted under §523(a)(5) or (a)(15). Prior to the enactment of BAPCPA in 2005, §523(a)(15) required that the debtor have an ability to pay a debt arising from a domestic support obligation. BAPCPA removed the “ability to pay component from §523(a)(15). Furthermore, the present needs of a spouse or a change in circumstances is not a factor when determining whether a domestic support obligation is a non-dischargeable debt pursuant to §523(a)(5) or (a)(15). In re Evans, 278 B.R. 407, 412 (Bkrtcy.D.Md. 2002) A. The $200,000 is non-dischargeable. In Mirea, the court found that the monthly mortgage, real estate taxes, and insurance were in the nature of alimony, maintenance, or support. In re Mirea, WL3042239, p. 7. Similarly here, the language and substance of the Agreement required Debtor to build Plaintiff a new home on property they already owned, and the parties contemplated that the house would be encumbered by a mortgage not to exceed $200,000, although the house would be worth no less than $1,000,000. The Debtor, like in Mirea, would pay the monthly mortgage, taxes, insurance, etc. The language and substance of the Consent Order is similar in that Debtor would build Plaintiff a new home but that, because Plaintiff relinquished all rights in 10 Maple Drive and 11 Main Street, Debtor would convey 10 Maple free and clear of a mortgage upon the closing of 11 Main Street. Even without a mortgage, Debtor agreed to pay taxes, insurance, utilities, telephone, maintenance and upkeep on Plaintiff’s new house until she cohabitated or remarried. Such payments – payoff of a mortgage, taxes, insurance – made until a spouse remarries is typical of a domestic support obligation, because the parties contemplate that support will no longer be necessary upon remarriage.

When Debtor failed to convey 10 Maple Street to Plaintiff, say nothing of conveying it free and clear of a mortgage, the Circuit Court enforced the Consent Order by both requiring the conveyance, and requiring the Debtor to pay Plaintiff $200,000, the amount of the outstanding mortgage, so that Plaintiff could pay off the mortgage and have a home free of a mortgage as contemplated by the Consent Order.  Tellingly, the Circuit Court considered all the expenses listed in paragraph 2 of the Consent Order to be “the home maintenance provision of the Consent Order.” 2011 Opinion, p. 31 (emphasis supplied). As to the other factors, (2) the Debtor was in a superior financial situation at the time of the Agreement and Consent Order; (3) the 10 Maple house served to provide a home to Plaintiff and the parties’ two children when Plaintiff relinquished rights to the martial home at 10 Maple Ave and 11 Main Street so that Debtor could sell both and retain all proceeds to (at least in part) pay off the mortgage on 11 Main Street; and (4) the Circuit Court found no evidence of overbearing at the time of the agreement. This debt, in the amount of $200,000 is clearly in the nature of domestic support obligations under §523(a)(5). Alternatively, at the very least, the debt it falls squarely within the definition of §523(a)(15) because the amount to pay off the mortgage is a debt to Plaintiff, a former spouse, that is incurred by the Debtor in the course of a divorce and in connection with a separation agreement, divorce decree, Consent Order and the 2011 Opinion and Order of the Circuit Court. B. The $100,000 debt is not dischargeable. In exchange for giving up her rights to any interest in Debtor’s businesses, Debtor was required to pay Plaintiff $100,000, indemnify and hold Plaintiff harmless from any liability arising from Debtor’s businesses, and, acknowledging that Plaintiff had signed certain personal guarantees for his businesses, Debtor was required “to properly maintain said outstanding personal guarantees so as not to harm” Plaintiff’s financial status. Agreement, ¶9. The Consent Order did not modify this language. However, the Consent Order added language to Paragraph 9 of the Agreement relating to payment and installation of a pool at 10 Maple Avenue. Thus, the language of the Agreement and Consent Order demonstrate that the obligations including the $100,000 debt, were in the nature of domestic support obligations. The other Mirea factors are also satisfied, factors 2 and 4 for the reasons stated above, and factor 3, the function served by the obligation was to maintain Plaintiff’s financial condition. The $100,000 may not be discharged pursuant to §523(a)(5). Alternatively, this debt also falls neatly within the definition of §523(a)(15) because the amount to pay for her interest in Debtor’s business is a debt to Plaintiff, a former spouse, that is incurred by the Debtor in the course of a divorce and in connection with a separation agreement, divorce decree, Consent Order and the 2011 Opinion and Order of the Circuit Court. C. The $15,000 debt is not dischargeable. Finally, the debt owed to Mrs. Maple for attorney’s fees relating to enforcing and defending a domestic support obligation is also non-dischargeable pursuant to §523(a)(5) or §523(a)(15). “The Fourth Circuit as well as the majority of bankruptcy courts hold that attorney fees arising from a divorce are in the nature of alimony, maintenance, and support.” In re Evans, 278 B.R. at 413 (Bkrtcy.D.Md.,2002), see also Trikeriotis v. Kauffman, WL 2316312, page 1(Bkrtcy.D.Md., 2007). It does not matter that the fees were to be paid directly to Plaintiff’s counsel rather than to Plaintiff who would then have to send payment to counsel. In re Prensky, 416 B.R. 406, 411 (Bankr.D.NJ.2009), is instructive. There, the wife incurred attorneys’ fees relating to the divorce trial and the trial court awarded counsel fees to the wife, to be paid by the ex-husband directly to the wife’s law firm. While that court found such attorneys’ fees to be nondischargeable under §523(a)(15) rather that §523(a)(5), it explained that the wife “is the intended beneficiary of the obligation and possesses both the rights and remedies at state law to enforce the Order. It is immaterial that the debt is payable to CCCC, LLP, . . .The Debtor’s obligation to pay the attorneys’ fees does not evaporate simply because the trial court attempted to coordinate a more expeditious method of payment.” Id.

V. CONCLUSION There is no evidence to oppose the finding that the Circuit Court of Caroline County’s Order that the award of $200,000 in lieu of delivery of the 11 Main Street property was a domestic support obligation under §523(a)(5); the finding that the refusal to pay the $100,000.00 in exchange for the business interests and the attorney fees of $15,000.00 to Mrs. Maple in support of debtor’s dependents under §523(a)(5) and (15) to be paid to the spouse under an order of an appropriate court are all non-dischargeable.