LEGAL GUIDE
Written by attorney Bradley David McCormack | Oct 24, 2011

Family Law implications in Chapter 7 and Chapter 13 Bankruptcy

Part I - The ABC’s of Bankruptcy

Chapter 7 Bankruptcy

Time Frame – 4 months from date of filing to discharge. A Meeting of Creditors (called a “341 Meeting" after the code section 11 U.S.C. § 341) is held 1 month after filing.

Liquidation of debt – no payments made towards debt

Secured Debt – Can be reaffirmed if current on payments and under equity level – major difference between Kansas and Missouri. Kansas has unlimited homestead and car exemptions while Missouri puts limitations. Debtor must decide to reaffirm or surrender secured debt. If he or she reaffirms, must sign additional contract called a Reaffirmation Agreement.

Unsecured Priority Debt – Survives the bankruptcy. Collection actions are stayed during the 4 month period but can restart upon discharge. Priorities are defined in 11 U.S.C. § 507.

Unsecured Non-Priority Debt – Completely discharged without payments

Who’s in charge? - Chapter 7 Trustee, a private attorney appointed by the Court. All cases are overseen by the United States Trustee Office who can review the case upon recommendation of the Chapter 7 Trustee

Can Creditors Attack? - Not without leave. 11 U.S.C. § 362 allows a creditor relief from the automatic stay upon motion for “cause". Most common relief from stay in Chapter 7 is a secured creditor who is repossessing property. Rare for other creditors since the timeframe is so short.

Final outcome – Discharge in 4 months. Debtor is clear of unsecured non-priority debt, still owes priority debt and any secured debt he or she properly reaffirmed. Discharges are governed by 11 U.S.C. § 524

Chapter 13 Bankruptcy

Time Frame – Minimum of 3 years, maximum of 5 years from date of filing to discharge. A Meeting of Creditors (called a “341 Meeting" after the code section 11 U.S.C. § 341) is held 1 month after filing.

Reorganization of debt – Debt will make payments towards some or all of debt

Secured Debt – Chapter 13 Bankruptcy is primarily used to repay secured debt to “save" it. Debtor can be behind on secured debt and retain the property in Chapter 13. The Debtor must repay the arrearage within 5 years from filing. Upon discharge Debtor will still own the secured property and be caught up on loan. Any car loan will be paid off in the course of the Chapter 13 Bankruptcy.

Unsecured Priority Debt – Will also be paid off in bankruptcy. The plan payment will include payments towards the priority debt. Must be paid off in the 5 year period unless Survives the bankruptcy. Collection actions are stayed during the 4 month period but can restart upon discharge.

Unsecured Non-Priority Debt – Completely discharged. Depending on the Plan, Debtor may pay all, some or none of the unsecured debt.

Who’s in charge? - Chapter 13 Trustee. In Kansas City, MO, all cases are overseen by the Office of Richard V. Fink. In Kansas City, KS, they are overseen by the Office of William Griffin. All cases are overseen by the United States Trustee Office who can review the case upon recommendation of the Chapter 13 Trustee

Can Creditors Attack? - Not without leave. 11 U.S.C. 362 allows a creditor relief from the automatic stay upon motion for “cause". Relief From Stay is more common a Chapter 13 than a Chapter 7 as the case lasts for a significantly longer period of time.

Final outcome – Discharge in 3-5 years. Debtor is clear of unsecured non-priority debt and priority debt. Debtor will have become current on any retained secured debt and will recommence payments to the secured creditor under the original terms of the loan.

Part II – How does this affect Family Law?

When should a couple file for Chapter 7 bankruptcy in relation to their divorce?

· A Chapter 7 before the divorce –

Allows the couple to dispose of all debts prior to the divorce action

Can be a Joint Petition since the couple is still legally married – does not matter if separated, just must be married

Requires some cooperation between the husband and wife to provide documentation to the attorney and attend the 341 Meeting of Creditors

· A Chapter 7 during the divorce -

A bankruptcy filing would stay the divorce proceedings for the 4 months. The divorce could not continue until discharge or if one party sought relief from the automatic stay

While still technically married, the petition could be done jointly, or as individuals

The bankruptcy would relieve one or both parties of debt, regardless of how the original divorce petition proposed debt distribution. The Bankruptcy could require additional pleadings in the divorce decree

· A Chapter 7 after the divorce –

Can only be filed individually

If the filing party has a Domestic Support Obligation, it still owes the debt and must make the ongoing payments (11 U.S.C. § 362(b)(2))

If the filing party was ordered to assume debt from the non-filing party but has that debt discharged in the Bankruptcy, he or she could be in default of the divorce decree

When should a couple file for Chapter 13 bankruptcy in relation to their divorce?

· A Chapter 13 before the divorce –

The Chapter 13 can still dispose of all debt and can be filed jointly as the divorce has not occurred.

The Debtors will need to seek relief from stay to file the divorce pleadings

The divorce pleadings regarding debt must reconcile with each Debtors’ intentions in the Chapter 13 filing.

The case can be split into 2 cases if the Debtors cannot work together through the 5 years

· A Chapter 13 during the divorce –

The Chapter 13 stays the divorce pleadings and a party would need to seek relief from stay to continue with the pleadings.

While technically still married, a joint petition is possible.

The separation of marital debt would have to be reconciled with the Chapter 13 pleadings.

· A Chapter 13 after the divorce –

As discussed below, the major factor to review is attempting to discharge debt that was assigned in the Divorce Decree

Part III – My client just got a Notice of Bankruptcy Filing for his/her ex-spouse – what should I do? Chapter 7 Version

Check the pleadings

If your client is owed a Domestic Support Obligation Debt, check the filer’s pleadings under Schedule E. This Schedule is for unsecured, non-priority debt. If the DSO debt is properly listed under Schedule E, it will survive the bankruptcy.

The DSO debt is not listed

The path of least resistance is to contact the bankruptcy attorney, it could be an oversight. However, if it is intentional, the best course of action is to attend the 341 Meeting. All Creditors are allowed to come to the Meeting and ask questions of the Debtor under oath. You can ask the questions and raise the issues in front of the Trustee who will investigate further.

The Debtor was supposed to assume some marital debt but he/she is attempting to discharge it

Many times in divorce decrees, a spouse is to assume some unsecured debt. In order to “assume" the debt, he or she must affirmatively remove the other spouse from the debt with that company. If the Debtor has done this and the non-filing spouse is not exposed to liability, he or she can discharge the debt. If, however, the non-filing spouse was not removed and is still liable, the Debtor is in default of the Divorce Decree. The non-filing spouse has a cause of action against the Debtor.

My client just got a Notice of Bankruptcy Filing for his/her ex-spouse – what should I do? Chapter 13 Version

Check the pleadings

Again, a DSO Debt should be in Schedule E. Further, check the Chapter 13 Plan for treatment of the DSO Debt. The Plan must address how all Debt is to be paid, including the DSO. It must be paid in full during the 5 year period.

File a Proof of Claim

As opposed to the Chapter 7, the Chapter 13 requires an additional step from the non-filing spouse. The spouse must file a Proof of Claim with the Bankruptcy Court to ensure payment of the claim. The Notice of Bankruptcy Filing the spouse receives will also include a sample Proof of Claim form. The Proof of Claim requires documentation to back up the amount of the claim.

The Debtor was supposed to assume some marital debt but he/she is attempting to discharge it

Just like in a Chapter 7, the Debtor could be in default of the Divorce Decree. Again it is wise to attend the 341 Meeting of Creditors to ask the Debtor questions regarding the Debt while the Debtor is under oath.

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