Bankruptcy and Divorce 810-235-1970

DIVORCE AND BANKRUPTCY IN DIVORCE A STATE COURT HAS CONTROL OVER YOUR PROPERTY WHICH SHIFTS TO FEDERAL COURT IN BANKRUPTCY.
When a bankruptcy case is filed by or against a spouse while a divorce is pending, exclusive jurisdiction over the property of the debtor spouse (the bankruptcy estate) is automatically transferred to the bankruptcy court. See In re White, 851 F2d 170, 173 (6th Cir 1988).
 WHAT IS THE BANKRUPTCY ESTATE? The bankruptcy estate consists of all property of the debtor. 11 USC 541 defines property of the estate very broadly; generally, it includes all property of the debtor “wherever located and by whomever held.” See 11 USC 541 .
FILING FOR BANKRUPTCY STOPS /LIMITS WHAT A DIVORCE COURT CAN DO TO YOU. When a bankruptcy is filed by (or against) a spouse while a divorce case is pending in state court, the state court’s ability to take action against property of the debtor’s estate is automatically stayed or limited by 11 USC 362.
IN BANKRUPTCY TALK THE AUTOMATIC STAY STOPS MOST COLLECTION ACTIONS AGAINST YOU. There are some exceptions to the automatic stay pertaining to family law matters, which are found in 11 USC 362(b)(2).  
FOR INSTANCE YOU WILL HAVE TO CONTINUE TO PAY CHILD SUPPORT AND SPOUSAL SUPPORT. WHAT ARE THE TYPES OF BANKRUPTCY. The Bankruptcy Code is embodied in Title 11 of the United States Code and, within Title 11, four different types of bankruptcy are available to individuals—namely Chapters 7, 11, 12, and 13.
HOW DOES A BANKRUPTCY START. There are two ways in which a bankruptcy may be commenced—voluntarily and involuntarily—and both forms of commencement invoke the automatic stay. See 11 USC 362(a) In a voluntary bankruptcy, the debtor files the bankruptcy petition. In an involuntary bankruptcy, the statutory number of creditors file the bankruptcy against the debtor under 11 USC 303. An involuntary case against an individual may only be commenced under Chapters 7 or 11 of the Bankruptcy Code. Only a debtor may voluntarily file a case under Chapters 12 and 13. A brief overview of the attributes and eligibility requirements of these four chapters is as follows:
  • Chapter 7—Liquidation: In this bankruptcy proceeding, the debtor turns over all nonexempt property to the Chapter 7 trustee, whose job it is to sell or liquidate the property and distribute the proceeds to creditors pro rata, usually in a one-time payment once all of the assets have been administered. The Chapter 7 trustee will also investigate the debtor’s financial affairs to determine the location of any nonexempt property (including causes of action) that can be turned into cash for distribution to creditors. The debtor will be released (i.e., discharged) from the unpaid portion of most types of debts. However, DSOs (defined in 11 USC 101(14A)) and debts owing to a spouse, former spouse, or child of the debtor and arising out of a divorce or separation are nondischargeable. See 11 USC 523(a)(5), (15).  The Chapter 7 trustee is always appointed by the U.S. trustee and is usually a member of a panel of trustees.
  • Chapter 11—Reorganization: The purpose of this bankruptcy proceeding is to allow the debtor a breathing spell from creditors and enable the debtor to reorganize his or her financial affairs. The debtor retains control of all of his or her property unless a Chapter 11 trustee is appointed for cause. Chapter 11 is the most expensive and complicated type of bankruptcy and can last for several years. The debtor proposes a plan of reorganization that is subject to the vote of the creditors. Individuals with debts exceeding the dollar limits in 11 USC 109(e) are eligible to file Chapter 11

.

  • Chapter 12—Family farmer bankruptcy: This type of bankruptcy may be filed only voluntarily and only by a family farmer with regular annual income. This proceeding is similar to a Chapter 13, described below, but the debt limits in Chapter 13 do not apply to Chapter 12.
  • Chapter 13—Adjustment of debts: This type of bankruptcy may be filed only voluntarily and only by individuals with regular income (filing with or without a spouse) and with debts that fall within the statutory limits for secured debt and unsecured debt. Those debt limits are adjusted at three-year intervals pursuant to 11 USC 104. As of July 2010, the most recent adjustment was effective April 1, 2010, and it provides that only an individual with regular income and unsecured debts of less than $336,900 and secured debts of less than $1,010,650 is eligible to be a debtor under Chapter 13. Soon after a Chapter 13 case starts, the debtor must propose a plan but, unlike a Chapter 11, the creditors of a Chapter 13 debtor do not get the opportunity to vote on it. Instead, the bankruptcy court and the Chapter 13 trustee review the plan and must approve it as fitting within the strict requirements for a plan under Chapter 13. See 11 USC 1325. In the Chapter 13 plan, the debtor commits to pay the Chapter 13 trustee an appropriate part of his or her income or other property for a period of time (generally three to five years). A Chapter 13 trustee is appointed in each Chapter 13 case to distribute the debtor’s payments to the creditors in accordance with a confirmed Chapter 13 plan. Once the debtor has completed all payments due under a confirmed Chapter 13 plan, the debtor receives a broader discharge than individuals receive in a Chapter 7 liquidation. Priority debts must be paid in full, see 11 USC 1322(a)(2), and, pursuant to 11 USC 507(a)(1), a debt for a DSO is a priority unsecured claim.

The main reason why an individual files bankruptcy is to try to secure a discharge from his or her debts. 11 USC 727 provides that all individual debtors are eligible to receive a discharge unless he or she has committed one of the “bad acts” described in 11 USC 727. However, even if a debtor is entitled to a discharge, 11 USC 523 provides that certain types of debt are nondischargeable. 11 USC 523 represents a legislative decision that some debts (including  Domestic Support Orders DSOs and other debts arising out of divorce or separation proceedings) must be paid even by a debtor who has otherwise been discharged of his or her other obligations.

YOU CAN DISCHARGE MORE DEBT IN CHAPTER 13 As one of several incentives in the Bankruptcy Code to encourage debtors to elect Chapter 13 rather than Chapter 7 bankruptcy, Congress gives Chapter 13 debtors who fully comply with their plans a discharge of a wider variety of debts. See 11 USC 1328(a). Chapter 13 debtors who do not complete their plans (due to circumstances not of their own making) might get a hardship discharge under 11 USC 1328(b), which is the same discharge that is given to debtors in Chapters 7 or 11. C. Eligibility for Bankruptcy 11 USC 109 sets forth the types of entities eligible to file for bankruptcy. Only a person, as that term is defined in 11 USC 109, may file a bankruptcy. Individuals, corporations, and partnerships are included in the definition of person.

CREDIT COUNSELING REQUIRED Further, to file a bankruptcy, an individual must, within the 180-day period preceding the date of filing, receive an individual or group briefing outlining the opportunities for available credit counseling and assisting the individual to prepare a budget analysis. This briefing must be received from an approved nonprofit budget and credit counseling agency. See 11 USC 109(h). As of July 2010, to file a Chapter 13 case, an individual must have less than $336,900 in unsecured debt and less than $1,010,650 in secured debt. (Dollar amounts are adjusted April 1 every three years with the last adjustment occurring on April 1, 2010.) See 11 USC 109(e). To file a Chapter 12 case, an individual must meet the definition of family farmer and have regular annual income. See 11 USC 109(f). An individual’s ability to file a bankruptcy case or obtain the benefit of the automatic stay may also be limited by previous bankruptcy cases. D. Dismissal or Conversion 11 USC 707 authorizes the dismissal or conversion of a Chapter 7 case under certain circumstances. In general, a case may be dismissed or converted for cause under 11 USC 707(a), which may include failure to file documents in a timely manner, undue delay that is prejudicial to creditors, failure to pay statutory fees, or for abuse. See In re Zick, 931 F2d 1124 (6th Cir 1991). A bankruptcy court may also dismiss a bankruptcy case under 11 USC 707(b) if the case would be “an abuse of the provisions” of Chapter 7 and if the debtor’s obligations are primarily consumer debts.

A TEST IN BANKRUPTCY IS WETHER YOU HAVE THE MEANS TO PAY YOUR BILL BY A “MEANS TEST”. The Bankruptcy Code contains an elaborate formula to determine whether a case is presumptively abusive, brought in by the Bankruptcy Reform Act of 2005, called the means test. 11 USC 707(b).

THE TEST IS THE MEDIAN FAMILY INCOME IN YOUR STATE The test is applied only if the debtor’s current monthly income, as defined in 11 USC 101, is above the safe harbor provision set forth in 11 USC 707(b)(7). If it is, the debtor must perform a complicated set of calculations to determine whether the debtor’s income, minus certain standardized expense deductions, is above a certain threshold. If so, the case is presumed to be an abuse. However, if the debtor’s income is less than the median income for a family the size of the debtor’s, the debtor meets the safe harbor provision and does not need to perform the means test calculations. Similarly, if the debtor’s debts are primarily business debts, the debtor need not perform the means test calculations. This test is designed to keep filers with higher incomes from filing Chapter 7 and instead force them into Chapter 13. The idea was to restrict access to Chapter 7 liquidations to those who are truly unable to pay their debts and to require people who have the ability to repay their debts to do so. 11 USC 707(b)(3) may be used to dismiss a case even if a debtor is found to be eligible for relief under 11 USC 707(b)(2)—the means test. In essence, if the court believes that it would be an abuse of the Bankruptcy Code to grant the debtor relief under Chapter 7, it may deny such relief under this provision. II. Property of the Estate A. Included Property 11 USC 541sets forth what is and what is not property of the bankruptcy estate. Generally, the bankruptcy estate consists of everything—“all legal or equitable interests of the debtor in property as of the commencement of the case”—with certain exceptions. Property of the estate also includes the following:

  • interests in property recovered by the trustee or debtor
  • interests in property preserved for the benefit of or ordered transferred to the estate
  • inheritances, property settlements, or life insurance policies if entitled to receipt within 180 days of the petition date
  • proceeds of estate property
  • funds contributed to 11 USC 529 educational plans over a certain amount
  • undivided co-ownership interests

Property becomes estate property even if there are transfer restrictions on it or if the applicable agreements contain conditions related to the debtor’s insolvency or financial condition, or the commencement of a bankruptcy case (so called ipso facto clauses). However, the estate may not possess an interest greater in the property than the debtor had at the start of the case.

THERE IS A LIST OF VALUES FOR VARIOUS TYPES OF PROPERTY THAT WILL EXEMPT  THAT PROPERTY FROM BEING TAKEN BY THE TRUSTEE. In a Chapter 7 case, the bankruptcy trustee must administer all property of the estate by selling, or otherwise liquidating it if it can be liquidated, and reducing claims and causes of action to judgments that can be collected. Any property that is held by others, either wrongfully or not, must be brought into the bankruptcy case (by agreement or order) and be administered. Timing also plays a role in whether certain assets are considered part of the estate. If a debtor becomes entitled to a divorce settlement, bequest, devise, inheritance, or the proceeds of life insurance within 180 days of the filing, these assets become property of the estate. Importantly, exempt assets, constitute property of the bankruptcy estate at the start of the case. B. Excluded Property Items excluded from property of the estate are different from exempt assets because exempt assets are still part of the estate where excluded items never become part of the bankruptcy estate. Excluded items include the following:

  • postpetition earnings of the debtor in a Chapter 7 case (although these earnings are included in a Chapter 11, 12, or 13 case)
  • in general, property acquired postpetition (subject to exceptions )
  • property held for the benefit of the debtor in a trust that restricts transfer
  • any power the debtor may exercise solely on behalf of someone else
  • any interest of the debtor as a lessee under a lease of real property (not residential) that expired before the case or that expires during the case
  • eligibility to participate in programs authorized under the Higher Education Act of 1965
  • certain interests of the debtor in liquid or gaseous hydrocarbons
  • funds placed in an educational individual retirement account or 11 USC 529 plan account in the 365 days before the petition, up to $5,475 of funds placed into the account between one and two years before the petition, and everything placed into the account more than two years before the petition
  • amounts withheld and placed into an Employee Retirement Income Security Act of 1974 (ERISA)-regulated employee benefit plan, deferred compensation plan, or tax-deferred annuity

A full list of the items that are not included in property of the estate is found in 11 USC 541(b)(1)–(8). C. Exemptions Federal Exemptions Exempt property is property of the bankruptcy estate that the debtor can keep to implement the fresh start policies of the Bankruptcy Code and that is protected from distribution to creditors. However, certain types of claims, such as nondischargeable tax claims and DSOs, can be recovered even from exempt property. The Bankruptcy Code allows a debtor to choose between the standardized federal exemption scheme found in the Bankruptcy Code and the exemption schemes found in each state’s specific statutes. Exemptions allow debtors to exclude various types of property from the bankruptcy estate—essentially, the property is “brought in” by 11 USC 541and then taken back out once the exemption is deemed allowed. Under the Bankruptcy Code, as of April 20, 2010, each individual debtor may take the following exemptions:

  • homestead (up to $21,625)
  • motor vehicle (up to $3,450)
  • household furnishings (up to $11,525)
  • jewelry (up to $1,450)
  • “wild card”—$1,075 plus up to $10,825 of any unused homestead exemption—this may be applied to anything
  • tools of the trade (up to $2,175)
  • unmatured life insurance contract
  • dividends from unmatured life insurance (up to $11,525)
  • health aids
  • right to receive Social Security benefit; veterans benefit; disability benefit; alimony or support; and payment under a stock, bonus, pension, profitsharing, or similar plan
  • right to receive an award or payment related to reparations for a crime, wrongful death, a life insurance contract, personal bodily injury, or loss of future earnings
  • retirement funds

— [] Source Michigan Family Law ch 17 (Hon. Marilyn J. Kelly et al eds, ICLE 7th ed 2011), at http://www.icle.org/modules/books/chapter.aspx/?lib=family&book=2011553510&chapter=17 (last updated 12/16/2011

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