Protection of Dissolution
and Lien Rights
This discussion of dissolution and lien rights is from “Overview of Arizona Divorce Principles for Bankruptcy Practitioners” by John McKindles
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Table of Contents
B. Separate Property
C. Liability for Debts of Spouse
Jurisdiction to Control and
Dispose of Community and Separate Property Assets
Jurisdiction to Determine
Separate Property Rights
Jurisdiction Over Allocation and
Disposition of Debt
ERISA Retirement Plans and the
Community Property and the
I. Priority of Past Due Support Over
J. Protection of Dissolution and
Advisability of Joint Bankruptcy
Filing and Conflict of Interest Problems
Impact on Future Community
M. Impact of Discharge on Secured
With respect to support
issues, the nature of any payments to be made by the other party needs to be
clearly identified in a Decree of Dissolution and any other documentation which
characterizes the nature of the parties’ interests and liabilities. While
support claims are clearly given non-dischargeable and priority status under the
Bankruptcy Code, there is another section which has created some turbulence
regarding dischargeability of otherwise dischargeable debts: 1 USC section
523(a)(15). Since the enactment of the Bankruptcy Reform Act of 1994,
Bankruptcy Courts have routinely found themselves embroiled in fact-finding
determinations pursuant to the statute.
all marital debt not just support, is presumptively non-dischargeable. Further,
it is normally the debtor’s burden to show the required elements reflected in
subparagraph 15 in order to qualify for dischargeability of those debts.
Although the statute applies a two-prong test to the dischargeability of the
indebtedness, much litigation and a broad diversity of reasoning and
determinations has followed. The burden is essentially that the debtor must show
that he lacks the ability to pay and that the benefits of discharge to the
debtor outweigh the detriment to the former spouse.
Procedurally, a support
claim under §523(a)(5) does not require an objecting party to bring a claim to
confirm the non-dischargeability of the support indebtedness. However, where
there is some confusion over the nature of indebtedness, it would be wise to
bring the claim prior to the bar date reflected in the §341(a) Notice.
Conversely, in order to enforce the nondischargeability of a debt under
§523(a)(15), the objecting party must bring an action for such determination
prior to the bar date reflected in the §341(A) Notice. The rule is strict and
unless the claim is brought prior to the bar date, it will not be heard. These
are adversary proceedings, requiring a Complaint, Summons, filing fee and
Once the dischargeability
of such indebtedness is challenged under §523(a)(15), the debt is considered
presumptably non-dischargeable and the debtor carries the burden of showing his
inability to pay and that the benefits of discharge to him or her outweigh the
detriment to the ex-spouse.
the Bankruptcy Court has the authority to determine the discharge-ability of
such debts under §523(a)(15), whereas both State and Bankruptcy Courts have
concurrent jurisdiction to determine the nature of the support exclusions to
discharge under §523(a)(5). It is an understatement that the Courts have not
uniformly interpreted and applied §523(a)(15).
For example, the majority
of Courts impose upon the debtor the burden of proof for both factors; ability
to pay and detriment. A second group of courts allocates the burden of proof for
detriment to the ex-spouse and the ability to pay to the debtor and another
group of courts places the burden of proof for both factors on the ex-spouse.
Other factors which have
caused consternation among courts is the time period to be used in determining
the debtor’s ability to pay and the comparative benefits/detriment to the
ex-spouse factors. While a majority of courts holds that the appropriate date
for determining this financial condition is the time at trial, taking future
earning potential into account, another grouping of courts utilizes the date of
the filing of the petition in bankruptcy.
This two-prong test is in the disjunctive and has
been uniformly applied as requiring a determination of the first prong prior to
addressing the second. In other words, the debtor must be shown to have the
ability to pay prior to addressing the second prong of the test. If the debtor
is able to persuade the court that he or she does not have the ability to pay,
the inquiry stops there and the debt is discharged. See In Re Silvers,
187 B.R. 650 (Bankr. W. D. Mo. 1995).
Assuming the court
determines that the debtor has the ability to pay, the court will then consider
the balancing of the benefit of discharge to the debtor over the detriment to
the ex-spouse. In this regard, the courts have fairly consistently adopted a
“totality of the circumstances” evaluation in order to address the inquiry under
A.R.S. § 523(a)(15)(B). There has been less than uniform application by the
courts in this area. One of the troublesome areas is whether the court should
consider the current spouse’s income in determining the debtor’s ability to pay
and the comparative benefit/detriment analysis. As might be expected, the courts
have fallen into roughly three categories in this regard. However, the most
recent cases show a preference by the courts to include the debtor’s current
spouse’s income in determining both prongs of the test.
There appears to be
little to guide Arizona practitioners in the reported cases, perhaps because
the non-debtor ex-spouse, whose larder is exhausted and saddled with the
prospect of more debt than expected under the Decree, doesn’t have the money to
pursue the claim under A.R.S. § 523(a)(15) necessary in order to effectively
challenge the dischargeability of the debtor as to those debts. It is also not
unlikely that the non-debtor ex-spouse is precariously close to a Chapter 7
Bankruptcy as well.