WHAT DIVORCE ATTORNEYS NEED TO KNOW ABOUT BANKRUPTCY-

At the center of most divorces is the division of assets, debts and income. Sometimes these matters are purely dealt with by agreement by the parties and sometimes they are dealt with by Courts. Despite having an agreement or a Court order on the matter though, the matter may not be final if one of the spouses subsequently files a Chapter 13 divorce.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) introduced a new definition to the Bankruptcy Code under § 101(4A): the Domestic Support Obligation, which is:

a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, 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.

Determining whether a debt is, in fact, a Domestic Support Obligation, as opposed to an obligation arising from a property division or settlement, determines the obligation’s dischargeability in a Chapter 13 bankruptcy. From the creditor’s perspective, the holder of a Domestic Support Obligation claim has special protections under the code, including:

  • If an obligation is deemed a Domestic Support Obligation, then it is considered a priority claim under § 507(a)(1)(A) and entitled to full payment under the debtor’s Chapter 13 plan pursuant to § 1322(a)(2) unless the claimant agrees to different treatment.
  • The debtor has incentive to remain current in any post-petition Domestic Support Obligation payments because under § 1325(a)(8), the debtor’s plan may not be confirmed if he or she is in default.
  • Per Section 1307(a)(11), during the case, the nonfiling spouse may seek the dismissal or conversion of the debtor’s Chapter 13 if the debtor fails to pay any post petition Domestic Support Obligation as it comes due.
  • The Chapter 13 discharge will not be granted to a debtor until the Domestic Support Obligation amounts due both before and after the bankruptcy filing have been paid in full pursuant to § 1328(a)(1).

Accordingly, it is very important that a divorce attorney draft a property settlement agreement that casts her spouse’s obligations as Domestic Support Obligations. With the exception of section B above, the definition of a Domestic Support Obligation is written very broadly to encompass most obligations that would typically arise from a domestic proceeding. Section B requires that the debt be “in the nature of alimony, maintenance, or support.” This is often unclear.

The majority of the requirements for defining a Domestic Support Obligation, that is, subsections A, C and D of § 101(4A), turn on objective criteria, such as the identity of the payee, the type of instrument establishing the obligation, and whether the obligation has been assigned. The more difficult determination is often whether the obligation meets the requirements of subsection B — that it be “in the nature of alimony, maintenance, or support.” The intent of the parties controls, but determining that intent in hindsight and from prior orders or agreements is not always easy.

In the Fourth Circuit, courts look at the intent of the parties to create a support obligation. When construing property settlement agreements, courts determine whether the parties intended the obligation as alimony, maintenance, or support at the time of the execution of the agreement. If the intent of the parties was that the obligation was merely a division of property, then the obligation is not a Domestic Support Obligation.

The Fourth Circuit has developed an “unofficial” test for the intent inquiry, which provides for the court to look at the following factors.

  • Courts consider the actual language and substance of the agreement, being mindful of the context in which the obligation arises under the agreement. Labels, while suggestive, will not control. Courts also will consider factors such as whether the payment is to be made in a lump sum, more akin to property division, or over a period of time in order to provide support. Also, in interpreting whether the language of the agreement favors a property division or a Domestic Support Obligation, courts will look at factors such as any agreed tax treatment for the obligation, (a spouse who has taken the benefit of treatment of marital obligations as alimony may be estopped from later claiming the obligation was a property settlement and an oblige who did not report past payments as alimony income may be estopped from contending the obligation was alimony) whether the parties waived support, and how the agreement is organized.
  • Courts may consider the parties’ financial situation at the time of the agreement. Relevant factors include the prior work experience, employment history, physical health, potential earning power, and business opportunities.
  • Whether one spouse has custody of minor children from the marriage.
  • Whether the agreement terminates on death or remarriage
  • Whether or not the payments are designated for specific purposes, e.g. medical care, mortgage,
  • Whether or not a receiving spouse is employed

So getting a large property settlement in return for reduced alimony may be a short lived victory if the former are discharged in bankruptcy shortly thereafter. Though a state court might find this to be a change in circumstances that permits modification of the alimony, this arguably violates the Bankruptcy Code’s “fresh start” policy.

Posted in Bankruptcy, Consumer Protection Laws, Debt Settlement, Uncategorized | Leave a comment

THE BANKRUPTCY STIGMA

Is there a stigma attached to filing bankruptcy? Should there be such a stigma? The purpose of bankruptcy is to give people a fresh start. We don’t have debtors prison in this country. Bankruptcy is not about letting people avoid debts, it is about letting people and companies function in a productive manner. Bankruptcy laws are strict and they are enforced by the U.S Department of Justice. Bankruptcy fraud can land someone is prison for up to five years.

When the bankruptcy laws work like they are supposed to there is no shame in filing bankruptcy. Keep in mind that a good chunk of the commercial airline business and the USA auto business has filed bankruptcy (think U.S. Airways, Delta Airlines, Northwest Airlines, Chrysler, General Motors).

Bankruptcy is a powerful tool that serves a very important purpose. It is not in the interest of society to smother people in debt. You don’t want to discourage people from working and being productive. You also don’t want to discourage people from taking any sort of financial risk. Society benefits from people taking risks and from the creation of new businesses.

Some creditors might even benefit from a debtor’s bankruptcy. For example, when a debtor files bankruptcy, the debtor may decide to pay back secured creditors since the bankruptcy might enable the debtor to make such payments. Bankruptcy can also help creditors by giving the creditor more knowledge and control over the situation of the debtors. Knowledge of a debtor’s situation is very important for a creditor and can allow a creditor to avoid significant expenses incurred in trying to collect on a debt which for all practical purposes is not possible to collect.

Posted in Bankruptcy | Leave a comment

FORECLOSURE AND PERSONAL PROPERTY

A foreclosure of real property is generally governed by Chapter 4 of Title 55 of the Code of Virginia. A foreclosure on personal property is governed by Article 9 of the uniform commercial code as amended and adopted by Virginia at 8.9A-101 et seq. of the Code of Virginia.

The secured party can foreclose on personal property and repossess it in satisfaction of a debt, either in part or in whole, if (1) the debtor is in default, (2) the creditor is in possession of the collateral, (3) the secured party gives notice to the debtor that the secured party proposes to retain the collateral in satisfaction of the debt, and (4) a period of twenty-one days is given to the debtor to object to the creditor’s proposal and the debtor doesn’t object. See Virginia Code § 8.9A-620 and Virginia Code § 8.9A-621.

A secured creditor is also allowed to dispose of collateral and use proceeds to satisfy the underlying debt. The sale of any collateral must be “commercially reasonable.” The actual sale by the secured creditor may be private or public. Virginia Code § 8.9A-627 provides guidance for determining whether or not a sale is “commercially reasonable.” Virginia Code §8.9A-627(b) 2 states that a disposition is commercially reasonable if the disposition is made at the price current in any recognized market at the time of the disposition. Before disposition, any secured party must provide notice to the debtor and owner of any secondary obligor as well as to certain other interested parties. Per 8.9A­613 of the Code of Virginia, this notice is to include a provision notifying the debtor that he is entitled to an accounting.

Ten days before disposition of the property is presumptively reasonable as adequate notice for a secured creditor to have a sale of the secured property. The notices provided need to comply with Virginia Code § 8.9A-613. Basically, the notice must describe the debtor and the secured party; describe the collateral that is the subject of the intended disposition; state the method of intended disposition; state that the debtor is entitled to an accounting of the unpaid indebtedness and state the charge, if any, for an accounting; and state the time and place of a public disposition or the time after which any other disposition is to be made.

Virginia Code § 8.9A-617 states that a transferee that acts in good faith and who takes free of the rights and interests described in Virginia Code 8.9A-617(a), (e.g. a purchaser who thinks he is getting title free and clear) even if the secured party fails to comply with this title or the requirements of any judicial proceeding, takes title. Virginia Code § 8.9A-­619 provides for the creation of “transfer statements.” This document is not intended to effectuate a transfer, however, but is rather intended to evidence a transfer that has been made in accordance with the terms of Article 9.

The remedies for failing to comply with this provision are set out in Virginia Code § 8.9A­ 625. Per 8.9A-626 of the Virginia Code, if a debtor places the compliance of the creditor’s compliance with title 8.9A regarding a disposition at issue, the creditor bears the burden of proving a compliant disposition.

Posted in Uncategorized | Leave a comment

USING BANKRUPTCY TO STOP A FORECLOSURE

Chapter 13 Bankruptcy is often used to stop foreclosure one one’s home. Assuming your were eligible for Chapter 13, you would need to file your bankruptcy petition before the sale date of your property by the lender, i.e. the date of the foreclosure sale.

With your bankruptcy petition, you propose a plan to repay the amount you fell behind on the mortgage. Basically, you force a loan modification upon the lender. Bankruptcy law does not let you discharge a debt and keep the property that secures the debt. The filing of a Chapter 13 bankruptcy stops ALL collection activity though something called the automatic stay. The automatic stay remains in effect during the life of the case unless the court orders otherwise.

Under a typical plan, you make monthly payments to a court appointed bankruptcy trustee for generally three to five years. The amount of your monthly payment is determined by several factors such as the amount of debt you have, your ability to repay and the extent that you have assets. The bankruptcy trustee distributes the money to your creditors.

To be eligible to file a Chapter 13, you need (1) stable and regular income; (2) disposable income, from which to make monthly plan payments, determined from the excess moneys after paying for basic human needs; (3) secured debt—e.g., home and car loans— that does not exceed $1,081,400; and (4) unsecured debt—e.g., credit card debt, medical and legal bills, student loans—that does not exceed $360,475.

While in bankruptcy, in addition to the plan payment, one is responsible for making regular mortgage payments, car loan payments, food, utilities and other basic needs expenses.

Posted in Bankruptcy, Foreclosure, Home Ownership | Leave a comment

WHO OWNS MY MORTGAGE?

After someone takes out a home loan, the originator of the loan often turns around and sells the loan to a third-party. So even though you signed a promissory note where you have promised to make payments to a particular lender for a prolonged period, you may end up making all of your payments to another company that you have never dealt with. This may or may not be the actual owner of the note. Often when the loan is sold, it is serviced by a third party.

If you need to find out who owns your mortgage the first step is to locate the note and the deed of trust. These two documents indicate who you borrowed from initially.

On the deed of trust, there may be a MERS number. If there is a MERS number you can go to https://www.mers­servicerid.org/sis/ and type in the number. This may tell you who owns your loan and who services it. If that does not work you may also try the Fannie Mae and Freddie Mac websites respectively at www.fanniemae.com/homeaffordable and www.freddiemac.com/avoidforeclosure

If you are not certain who you should make your mortgage payments to, then you may make a written request to any purported assignee for proof of the assignment. If you do not receive a response, you may continue to discharge the debt by paying the original assignor per 8.9a-406(c) of the Code of Virginia. Obviously, this assumes Virginia law is applicable. Also don’t misunderstand this statute. The statute does not let one out of the debt obligation. It basically just protects someone from default should someone pay the wrong person due to no fault of their own.

Posted in Consumer Protection Laws, Foreclosure, Home Ownership | Leave a comment

New Bankruptcy Forms – December 2015

From the U.S. Court’s website:

Most Official Bankruptcy Forms were replaced on December 1, 2015, with substantially revised, reformatted, and renumbered versions. The 2015 forms are part of a forms modernization project that was begun by the Advisory Committee on Bankruptcy Rules in 2008. Among other things, the 2015 forms introduce different versions of case opening forms for individual debtors and non-individual debtors. Links to the instruction booklets for individual debtors, for non-individual debtors, and to a forms number conversion chart can be found below.

The revised forms are easier for debtors to understand and complete, and are designed to work with scheduled enhancements to the federal courts’ case opening and electronic case management system.

Posted in Bankruptcy | Leave a comment

WHAT IS IN A CHAPTER 7 BANKRUPTCY PETITION?

Besides personal identification information, miscellaneous certifications, residency information, debt classification as consumer or non-consumer, there are the bankruptcy schedules in each bankruptcy petition. These make up the real substance of each petition. The schedules include:

1) Schedule A. It identifies real property that they debtor may own. This often does not apply to Chapter 7 filers.

2) Schedule B. It identifies personal property that the debtor owns. On this schedule, the debtor identifies everything that is not real property that he or she owns or has an ownership interest in, e.g. cash on hand, bank accounts, household furnishings, clothing, jewelry, firearms, insurance policies, securities, annuities, etc.

3) Schedule C. It identifies property that the debtor wants to claim as exempt. On this schedule the debtor identifies property that he or she wants to keep after the bankruptcy. For a Chapter 7 to work for you, you either have to have minimal non-exempt property or you have to be willing to give up your non-exempt property. Schedule C requires identifying the legal exemptions that will enable you to protect as much property as you can.

4) Schedule D: It identifies creditors holding secured claims, the debts, and the collateral securing the debts.

5) Schedule E. It identifies creditors holding unsecured priority claims. There are numerous unsecured priority claims, but the most commons ones are child support and taxes.

6) Schedule F: It identifies creditors holding unsecured non-priority claims.

7) Schedule G: It identifies executory contracts and current leases. Basically, here you identify any contract to which you are a party where there are still unperformed obligations.

8) Schedule H: It identifies any other people or entities that may be jointly liable for your debts. Frequently, this is a spouse, but not necessarily so.

9) Schedule I: It identifies your current monthly income, e.g. wages, retirement, disability, social security, investment income, tax deductions, alimony, etc.

10) Schedule J: It identifies your current monthly expenditures, e.g. rent, utilities, taxes, food, clothing, health expenses, recreation, insurance, vehicle expenses, etc.

And finally due to the passage of BPCPA in 2005, the debtor must also sign off on a statement of current monthly income and a means test calculation. Basically, the means test looks at your personal situation and tells you whether or not you are presumed to be abusing the bankruptcy process. If your income is low enough, you will not need to deal with this test in much detail.

Posted in Bankruptcy | Leave a comment