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DIVORCE AND BANKRUPTCY

 

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

John McKindles

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Table of Contents

A. Community Property

B. Separate Property

C. Liability for Debts of Spouse

D. Jurisdiction to Control and Dispose of Community and Separate Property Assets

E. Jurisdiction to Determine Separate Property Rights

F. Jurisdiction Over Allocation and Disposition of Debt

G. ERISA Retirement Plans and the Bankruptcy Estate

H. Community Property and the Bankruptcy Estate

I. Priority of Past Due Support Over Other Creditors

J. Protection of Dissolution and Lien Rights

K. Advisability of Joint Bankruptcy Filing and Conflict of Interest Problems

L. Impact on Future Community Property Interests

M. Impact of Discharge on Secured Debts

Mesa divorce and community property attorney John McKindlesWith 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.

Consequently, currently 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 Notice.

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.

Jurisdictionally, only 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.