Divorce

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Divorce BankruptcyA Bad Train Wreck?
Randy Wilhite Tom Kirkendall 6 p.m., Tuesday,
March 8, 2005 rbwilhite_at_yahoo.com bigtkirk_at_kir.com
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Why is an understanding of bankruptcy law
important in handling a divorce case?
Risk Assets Claims Liability
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Public policies of bankruptcy law
The Equity Policy
The Fresh Start or Reorganization Policy
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What is the primary benefit ofbankruptcy to the
debtor?
But bankruptcy is strong medicine with serious
side effects
The Big D
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What are the main types of bankruptcy?
Chapter 11 Reorganization
Chapter 7 Liquidation
Chapter 13
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What are the Bankruptcy Courts?
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What is this thing called the automatic stay?
11 U.S.C. 362 The 362 Stay
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Section 362(a)
Except as provided in subsection (b) of this
section, a petition . . . operates as a stay,
applicable to all entities, of - (1) the
commencement or continuation, including the
issuance or employment of process, of a judicial,
administrative or other action or proceeding
against the debtor that was or could have been
commenced before the commencement of the case
under this title, or to recover a claim against
the debtor that arose before the commencement of
the case under this title (2) the enforcement,
against the debtor or against property of the
estate, of a judgment obtained before the
commencement of the case under this title (3)
any act to obtain possession of property of the
estate or of property from the estate or to
exercise control over property of the
estate (4) any act to create, perfect, or
enforce any lien against property of the
estate (5) any act to create, perfect, or
enforce against property of the debtor any lien
to the extent that such lien secures a claim that
arose before the commencement of the case under
this title (6) any act to collect, assess, or
recover a claim against the debtor that arose
before the commencement of the case under this
title . . .
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An important point about the automatic stay.
The automatic stay only provides protection to
the debtor, property of the debtor, and property
of the estate. It does not generally provide
protection to third parties, such as a non-debtor
spouse. Therefore, although a creditor will not
be allowed to proceed with collection efforts
against the debtor-spouse outside of the
Bankruptcy Court, a creditor is generally allowed
to pursue collection efforts outside of
Bankruptcy Court against a guarantor or co-debtor
of a debtor's debt, even a co-debtors
spouse. Another example of the strong medicine
with serious side effects of bankruptcy.
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Does the automatic stay cover divorce cases?
The filing of a petition . . . does not
operate as a stay - (1) under subsection (a) of
this section, of the commencement or continuation
of a criminal action or proceeding against the
debtor (2) under subsection (a) of this
section - (A) of the commencement or
continuation of an action or
proceeding for (i) the
establishment of paternity or (ii) the
establishment or modification of an order for
alimony, maintenance, or support or
(B) of the collection of alimony, maintenance,
or support from property that is
not property of the estate
11 U.S.C. 362(b) The Divorce Exceptions
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The Limitation of the Divorce Exception
So, family law proceedings that are exempt from
the automatic stay include commencement or
continuation of a proceeding (i) to establish
paternity (ii) to establish or modify alimony,
maintenance or support or (iii) to collect
alimony, maintenance or support from property
that is not property of the estate. 11 U.S.C.
362(b)(2). Accordingly, a critical aspect of the
divorce exception is a determination of what is
and what is not property of the estate.
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What is property of the estate?
11 U.S.C. 541 lists property of the
estate. Think of a snapshot of the debtors
assets and liabilities on the day he files
bankruptcy. 541(a)(2) includes in the estate
all interest of the debtor and the debtor's
spouse in community property as of the
commencement of the case that is (A) under
the sole, equal, or joint management and control
of the debtor or (B) liable for an allowable
claim against the debtor, or for both an
allowable claim against the debtor and an
allowable claim against the debtor's spouse, to
the extent that such interest is so liable.
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Whats in and whats out?

• Joint case? All property of both spouses,
  subject to exemptions.
• One spouse bankruptcy
• Debtor spouses separate property and sole
  management community property? Yes
• Joint management community? Yes
• Non-debtor spouses separate property? No
• Non-debtor spouses sole management community
  property? Maybe. See 11 U.S.C. 541(a)(2) and
  Tex. Fam. Code 3.202(d)

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Property of the estate implications
The most important marital property interest that
is not property of the bankruptcy estate is the
debtor-spouses post-bankruptcy petition
earnings. 11 U.S.C. 541(a)(6). Thus,
post-petition earnings of a debtor-spouse who is
in either a chapter 7 or chapter 11 case remain
available to the non-debtor spouse who is seeking
to enforce support claims in the state family
court without first having to obtain relief from
the automatic stay in the Bankruptcy
Court. However, in a chapter 13 case, the
debtor-spouse's post-petition earnings become
property of the estate and, thus, the non-debtor
spouse in regard to a chapter 13 case must seek
relief from the automatic stay before enforcing
support claims in state court. 11 U.S.C. 1306.
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What are these things called exemptions?

• The election of exemptions
• Federal under 522(b)(1) and (d) or
• State under Chapters 41 and 42 of the Texas
  Property Code.
• Texas is a debtors paradise.
• Why is the debtors designation of an exemption
  in a bankruptcy case important to a non-debtor
  spouse?

The Wilhite Family Homestead
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Do divorce obligations survive the discharge?

• Exceptions to Discharge under 11 U.S.C. 523(a)
  and Objections to Discharge under 11 U.S.C.
  727(a) Whats the difference?
• Strategy considerations regarding asserting an
  objection or exception to discharge.
• The key divorce exceptions to discharge
• 523(a)(5) Support payments to spouse or
  child.
• 523(a)(15) Non-support obligations to
  spouse or child.
• But there is a key procedural difference between
  the two exceptions.

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But what happens if a support obligationis
really a non-support obligation?
The 523(c)(1) Trap
Under 523(c)(1), a lawsuit to determine the
dischargeability of a non-support obligation
under 523(a)(15) must be brought within 60 days
after the first day scheduled for the initial
meeting of creditors. There is no such
requirement for bringing a lawsuit to determine
the dischargeability of a support obligation
under 523(a)(5). But what happens if, after
the deadline for filing a dischargeability
complaint in regard to a non-support obligation,
the Bankruptcy Court determines that what you
thought was a support obligation is really a
non-support obligation that has been cloaked in
support obligation clothing? Answer The Big D.
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Planning Considerations

• Structuring a property settlement in view of
  avoidance lawsuit risk.
• What is the difference between a voidable
  preference and a fraudulent transfer?
• The two types of fraudulent transfers
  constructive and generic.
• Is a lump sum payment a constructive
  fraudulent transfer?
• Is a payment over time subject to being a
  voidable preference?

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More Planning Considerations
Drafting considerations on finalizing a property
settlement. Partitioning of assets Is it worth
it? Should a prospective debtor-client convert
non-exempt personal property to exempt real
property?
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Miscellaneous thoughts
Should involuntary bankruptcy ever be considered
in the divorce context? What is the Bankruptcy
Rule 2004 examination? Who is the United States
Trustee? What are some of the other serious side
effects of bankruptcy? Pending bankruptcy
reform.
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Concluding Thoughts
The Perfect Marriage
Recognize the need for specialization. Profession
alism, credibility, and trust.