Family Law and Bankruptcy Issues

I. OVERVIEW
a. 5 types of bankruptcy
b. Distinction between Chapters 7, 11 and 13
c. Chapter 13 - super discharge

II. PROPERTY OF THE ESTATE - 11 U.S.C. §541- the bankruptcy estate consists of:
a. The spouses community property - In re Miller v. Walpin, 167 B.R. 202 (Bankr. C.D. Cal. 1994).
b. The debtor’s separate property - state law rules apply
c. Timing issues - status terminated, no property division, property of the estate unless family court order affecting

III. AUTOMATIC STAY
a. Stays all actions against the Debtor and property of the estate.
Exception: action to establish, modify and collect support obligations from non-estate property. See however, In re Gruntz, 166 F.3rd 1020 (9th Cir. 1999)(criminal case used to compel payment of support arrearages violates stay).
Co-debtor stay for consumer debt exists in Chapter 13 for co-obligor (non-filing spouse) only until case closed, dismissed or converted.
b. Relief from stay - when required or desired.

IV. EXEMPTIONS
a. Pre-petition planning - maximizing the amount of exempt assets depends on whether there is co-operation between the spouses or not.
(1) If still "Spouses", need non-filing spouse's written consent to choose 703 set of exemptions. CCP 703.140(a)(2).
Can choose the homestead exemption even if you no longer live in home as long as your "Spouse" does. In re Wilson 175 B.R. 735 (N.D. Cal. 1994)
b. Distinguish between CCP 703.140 et seq. [ "Wild Card" ] and CCP 704.011 et seq. [Homestead]
c. Selected Exemption Issues:
Spousal support only as "reasonably necessary" under CCP§703.140(b)(10)(D) - See In re Roth, 128 B.R. 785 (Bankr. C.D.Cal. 1991) involving Chapter 13 Debtor. ERISA qualified plans are not property of the estate. IRA’s and self employment plans are property of the estate and under CCP703.140(b)(10)(E) and CCP704.115 are exempt only to the extent reasonable and necessary for retirement needs.
QDRO’s v. IRA’s - absolute protection v. "reasonable v. necessary." See In re Gendreau 122 F.3d 815 (9th Cir 1997).
PRACTICE TIP:
Look to see if there an IRA rollover which can be transferred to an existing 401K.

V. DISCHARGEABILTIY OF DIVORCE RELATED OBLIGATIONS
a. Chapter 7 and 11 vs. 13 (super discharge)
b. Non-dischargeable debt without having to timely file a complaint - 523(a)(5):
Support - determined by Bankruptcy Court, labels do not control - In re Sternberg, 85 F.3d 1400 (9th Cir. 1196)
Legal fees as and for support - concurrent jurisdiction - strategy reasons for determining in bankruptcy rather than state court - ie, stay violation or violation of discharge injunction. Legal fees awarded on based upon financial need have been found to be non-dischargeable support. In re Gionis, 170 B.R. 675 (9TH Cir BAP 1994).
Non-dischargeable debt only if a timely complaint is filed:
(1) 523(a)(2) - fraud
523(a)(4) - F.C. 721 - breach fiduciary duty
523(a)(6) - willful and malicious injury - ie (physical abuse)
523(a)(15) - debt incurred by the Debtor in the course of a divorce or separation resulting from an agreement or decree. - In re Jodoin, 209 B.R. 132 (9th Cir. BAP 1997) (The Debtor has the burden of going forward with the evidence and the burden of persuasion as to both his ability to pay and the weighing of the detriment test.)
Defenses:
Debtor does not have the ability to pay from income or property; or
Discharging the debt would result in a benefit to the Debtor which outweighs the detriment to spouse
Indemnity - can either be in nature of support or non-dischargeable debt. In re Cooper, 83 B.R. 213 (Bankr. C.D. Ill. 1988); (but payment of priority tax claim does not give paying spouse a priority status claim - 11 U.S.C. §507(d)), or a 523 (a)(15) issue.
PRACTICE POINT:
The state court retains jurisdiction to modify spousal support obligations based upon changes in circumstance such as a discharge of non-support obligations. See, In re Siragusa 27 F. 3d 406, 408 (9th Cir 1994)

VI. MARITAL SETTLEMENT AGREEMENTS
PRACTICE TIPS:
a. Support treatment : document disparity in income in MSA
b. Record documents, MSA, Deed of Trust, Judgment or other documents, as soon as possible
c. Get security for obligations - Farrey v. Sanderfoot, 500 U.S. 291, 111 S.Ct. 1825 (1991) (judicial lien created upon division where ownership interest and lien created at same time - not avoidable); but see In re DiSalvo, 221 B.R. 769 (9th Cir. BAP) (debt extinguished for violation of one action rule).
d. Business assets - assets securitization - Bankruptcy Remote Vehicles (intangibles put into BRV, debtor then borrows against assets), (stock in separate company for receivables - but not for personal service business, ie, lawyer).

VII. STRATEGIC USE OF BANKRUPTCY IN DIVORCE PLANNING
(See attached hypothetical)
a. USES - Cooperative - shield assets from creditors
1. Which comes first - the Bankruptcy or Divorce - §541(a)(2) before or after property is divided
2. Exempt property to be divided/increase exemptions (Be aware of Trustee’s right to 250K capital gains exemption for residence)
3. Assignment of debts - F.C. 916
4. Division of assets - assignment of exempt property to spouse filing See, 703.140(a)(2) when only one spouse files
5. Co-debtor stay (Ch. 13) - protects non-earning spouse from creditors
b. ABUSES
1. Forces equal division of property without regard to who has been/or will be paying CP debts
2. Delays collection of support arrearages
3. Support offsets

VIII. PENDING LEGISLATION

FAMILY LAW/BANKRUPTCY HYPOTHETICAL

Assets: