Although bankruptcy is a tool used primarily by parties in financial distress, it is increasingly used by warring spouses as a weapon in divorce cases. Given present trends in divorce practice, divorce practitioners can benefit by staying abreast of developments in bankruptcy law. Recent developments in the law and the requirements of Rule 1.1(a) of the NH Rules of Professional Conduct emphasize the point that divorce attorneys must evaluate what would happen if one or both of the warring spouses files a bankruptcy petition.

Revising the "deal." Deals cut in family court are not cast in stone. A debtor through a bankruptcy may reclassify vague support obligations or discharge property settlements. A debtor may also, through a Chapter 13 filing, seek to obtain time to repay arrearages on nondischargeable support obligations over as much as 60 months. Since the Bankruptcy Code treats various types of divorce obligations differently, divorce attorneys should understand these differences in treatment prior to negotiating and drafting a settlement agreement or trying a divorce case, particularly when there is a likelihood of a bankruptcy filing.

Obtaining a Ceasefire. The initial objective of a bankruptcy petition is usually to remove the pressure from overzealous creditors, including former spouses, seeking to collect debts. This is achieved through the automatic stay, which is effective immediately upon a debtor's filing of a bankruptcy petition. Creditors, including former spouses, may no longer contact the debtor, attach the debtor's property, or pursue the collection of any debts once the bankruptcy petition has been filed. Any violation of the automatic stay may result in sanctions from the bankruptcy court.

Of course every rule has its exceptions and to the dismay of many divorce law practitioners, the exceptions are often uncertain. Some divorce-related actions are not automatically stayed. Exceptions exist to collect support from non-estate property, to establish paternity, or to establish or modify a support award. See 11 U.S.C. 362(b)(2). Understanding these exceptions is critical as there is the possibility of severe penalties if a divorce-related proceeding is mistakenly pursued.

Discharge = Freedom? The ultimate goal of a bankruptcy case is the discharge of debts, or more accurately a debtor's personal responsibility to pay such debts. This is an important distinction because it is often erroneously assumed that the debt or obligation simply vanishes at the conclusion of a bankruptcy case. Instead, a bankruptcy discharge releases a debtor (and only a debtor, not any cosigners) from the personal liability for paying the debt or obligation at issue. Furthermore, the bankruptcy discharge does not automatically release liens on a debtor's property. A separate motion must be filed to release the liens. If a debtor cannot avoid a creditor's lien, the property stays encumbered by the lien and the creditor may seek the liquidation or repossession of its collateral. The bankruptcy does render any deficiency uncollectible, since the debtor is released from personal liability following a bankruptcy discharge.

Debts owed to a spouse, former spouse, or children that were incurred for alimony or maintenance of the spouse, former spouse or child, however, are not dischargeable if incurred as the result of a separation agreement or under the divorce laws of the state. See 11 U.S.C. § 523(a)(5) and (a)(15). The Section 523(a)(5) exception works automatically, without the necessity of the creditor filing a complaint. See 11 U.S.C. § 523(c)(1). However, if any interested party questions whether the obligation is for support or is in fact a property division disguised in "support" clothing, a complaint to determine the dischargeability of those obligations may be filed at any time.

Unfortunately for divorce practitioners, creative drafting of the divorce decree and property settlement will not suffice to reduce the bankruptcy risk. Labels used by the parties and/or the state court simply are not controlling once the case makes its way to the bankruptcy court system. In two recent decisions in the First Circuit, Cowell v. Hale (In re Hale), 289 B.R. 788 (B.A.P. 1st Cir. 2003) and Werthen v. Werthen (In re Werthen), 282 B.R. 553 (B.A.P. 1st Cir. 2002), the rule has been clearly established that the bankruptcy court has the authority to go beyond the labels employed in a divorce settlement agreement even when the divorce court expressly uses terms such as "property division" in reaching its order.

Another bankruptcy complication is found in section 523(a)(15), which excepts certain debts incurred in the course of a divorce or in connection with a divorce agreement that are not already covered under section 523(a)(5). Debts of this type are often referred to as "property settlement" debts. Unlike support debts, which are always excepted from discharge, property settlement debts may be discharged in bankruptcy. To make a property settlement debt dischargeable a debtor must prove that he or she (1) does not have the ability to pay the debt or that (2) allowing him/her to receive a discharge of the debt will result in a benefit that is greater than the detrimental consequences that will befall the former spouse if the debtor is discharged from the debt. See Garrity v. Hadley, 239 B.R. 433 (Bankr. D.N.H. 1999).

Is it over? The intersection of bankruptcy and divorce law may occur at the time of the divorce, and even years afterwards. Financial problems are a common symptom of couples facing divorce. The same pattern of job loss, uninsured illness, and excessive credit card use familiar in Chapter 7 and 13 is common in divorce situations. For such couples, both a bankruptcy and a divorce may be needed to get a "fresh start." In these cases, timing is key and in some cases a joint bankruptcy before the divorce might be appropriate.

Simply because one former spouse files for bankruptcy protection does not mean that the outcome is pre-ordained against the other former spouse. There is hope and knowledgeable advocacy is the key. A series of determinations needs to be made about the nature of claims, their dischargeability, the relative financial position of the parties, and the strength and admissibility of the evidence the client can present.

For divorce practitioners, having access to bankruptcy law expertise is now a matter of necessity. The first step to taming the monstrous confusion created by the intersection of these two legal disciplines is to recognize that the bankruptcy issues are out there and will influence the efficacy of every divorce settlement reached by former spouses.

Joshua Menard is an attorney with Preti, Flaherty, Beliveau, Pachios and Haley in Concord. He is a graduate of Boston College School of Law and has been a member of the New Hampshire Bar since 2002.

Home | About the Bar | For Members | For the Public | Legal Links | Publications | Online Store
Lawyer Referral Service | Law-Related Education | NHBA•CLE | NHBA Insurance Agency | NHMCLE
Search | Calendar

New Hampshire Bar Association
2 Pillsbury Street, Suite 300, Concord NH 03301
phone: (603) 224-6942 fax: (603) 224-2910
email: NHBAinfo@nhbar.org
© NH Bar Association Disclaimer