 22  New Hampshire Bar Journal Fall 2009 DEBTS, DIVORCE AND BANKRUPTCY Representing Family Law Clients in a Down Economy By Attorneys Mark P. Cornell and Kelly Ovitt Puc IntroductIon During times of economic strength, divorcing parties are focused on valuing and dividing assets, typically the equity in the former marital residence, financial assets, and retirement accounts. In contrast, dur- ing difficult economic times, divorcing parties (and the courts) are frequently faced with the more daunting task of dealing with a marital home with negative equity, either one or both parties’ inability to main- tain the payments on the home mortgage, overwhelming debt loads and declining retirement values. In short, parties are often arguing over allocation of debts instead of distribution of assets. In the current economic downturn, divorcing couples are also faced with the recent decline in the real estate market. As a result, divorcing couples may be unable to sell the former marital residence due to negative equity in the property. It may be that neither party can make payments on the former marital residence, and thus are unable to maintain the debt service on the former home or sell it. Even when one of the parties is financially able to maintain the payments on the former home, he or she may be unable to refinance the mortgage to remove the former spouse’s name due to a lack of equity and tighter lending practices. Another common problem during an economic downturn is that the parties cannot make payments on unsecured debts, such as credit card debt, during or after their divorce. These debts may have been incurred or increased during a period of unemployment or underem- ployment. Parties may rely on credit during the financially difficult transition from one household to two households. The costs of the divorce, including attorney fees, may have been financed. The allocation of these debts can be problematic during a divorce. All of these factors increase the likelihood that one or both parties may consider filing bankruptcy either during or following a divorce. This article is intended to assist both the family law practitioner and the bankruptcy practitioner in identifying and addressing issues raised when divorce and bankruptcy intersect. This discussion assumes little or no prior knowledge of bankruptcy law. In the best-case scenario, the information provided will allow divorce counsel to proactively address these potential issues in a manner that is beneficial to both parties. Where this is not possible, counsel can also advise his or her clients as to the bankruptcy solutions that may or may not be available to assist in resolving the client’s financial troubles. A revIew of chApter 7 And chApter 13 Chapter 7 Bankruptcy A chapter 7 bankruptcy case is the traditional liquidation bankruptcy. In exchange for a discharge of debts, the bankruptcy debtor submits control of his or her assets to the bankruptcy court. Assets which are not exempt under federal or state law are subject to sale by the bankruptcy trustee to pay the creditors in the case. New Hampshire bankruptcy exemptions are fairly generous and in the vast majority of chapter 7 bankruptcy cases, no assets are sold.1 In most chapter 7 cases, the court issues a discharge order and the case is closed in approximately six months. With the passage of the Bankruptcy Abuse and Consumer Protec- tion Act of 2005 (BAPCPA), Congress added “Means Testing” into the Bankruptcy Code.2 The Means Test is intended to gauge the debtor’s ability to repay some or all of his or her debts. In order to be eligible to file a chapter 7 bankruptcy case, debtors must “pass” the Means Test. If the debtor is filing a chapter 13 bankruptcy case (discussed below), the Means Test may be used to determine what portion of the debtor’s income is actually available to fund a chapter 13 plan and the duration of the plan.3 The Means Test considers all income received by the debtor and the debtor’s spouse from any source during the six complete calendar months prior to the bankruptcy filing.4 The income received by the debtor’s spouse is included even if the spouse does not file for bankruptcy.5 However, the debtor may make a marital adjustment to deduct spousal income that is not contributed to household expenses.6 Furthermore, where the debtor is separated from his or her spouse, his or her spouse’s income may be excluded.7 The debtor is also allowed to deduct certain expenses on the Means Test,including court-ordered support payments.8 Chapter 13 Bankruptcy In contrast to a chapter 7 bankruptcy, a chapter 13 bankruptcy case is intended to allow a debtor with regular income to repay debts under court supervision. The debtor submits a repayment plan for approval of the court that calls for the repayment of some or all of his or her debts over a three-to five-year period.9 Instead of paying his or her creditors directly, the debtor makes a payment to the chapter 13 trustee, who disburses these payments to the creditors under the terms of the chapter  23  New Hampshire Bar Journal Fall 2009 13 plan. The amount of the payment to the chapter 13 trustee depends upon a number of factors. Upon completion of the chapter 13 plan, the court issues a discharge order that applies to any remaining balances on the debts included in the bankruptcy. One of the major advantages of filing a chapter 13 case is to deal with mortgage defaults and to avoid foreclosure. If the debtor is behind on a mortgage or other secured debt, the debtor can propose a plan to cure the arrearage on the secured debt over the life of the chapter 13 plan.10 The debtor often proposes to pay the regular (post-petition) payments on an ongoing basis directly to the secured creditor and then pay the amount of the arrearage through the chapter 13 plan. The debtor can file a chapter 13 case at any time prior to the completion of the sale to a high bidder at a foreclosure sale.11 The debtor will normally be responsible for the payment of the attorneys’ fees and costs associated with the foreclosure sale.12 The effect of such a plan is to force the lender to start accepting regular monthly payments and to allow the debtor to cure the payment default through a three-to five-year payment plan. The Discharge Order The discharge order entered in either a chapter 7 or a chapter 13 case generally prohibits any of the debtor’s pre-bankruptcy creditors from at- tempting to collect the unpaid balances of their claims from the debtor.13 However, where a debt is secured by the debtor’s assets, as in the case of a mortgage or car loan, these security interests generally pass through bankruptcy unaffected.14 Furthermore, a non-filing spouse or ex-spouse will receive no protection from the debtor’s bankruptcy discharge.15 Therefore, to the extent that the non-filing spouse is personally liable on the debts discharged in the debtor’s bankruptcy filing, the non-filing spouse will remain liable. The debtor’s creditors will likely seek to collect upon their claims from the non-filing spouse to the extent that he or she is liable on those claims under state law. the AutomAtIc StAy Upon the filing of a bankruptcy petition, an automatic stay goes into effect which applies to all creditors, including a spouse or former spouse of the debtor.16 The automatic stay prohibits creditors from attempting to collect claims against the debtor or against property of the debtor’s bankruptcy estate.17 Specifically, the stay prohibits the commencement or continuation of judicial actions or proceedings; the enforcement of judgments; attempts to obtain possession of property; the creation, 18 perfection or enforcement of liens, as well as other collection attempts. Thus, filing a bankruptcy petition is likely to halt pending divorce or post-divorce proceedings. As to actions against the debtor, the automatic stay lasts until the earliest of (1) the time the case is closed, (2) the time the case is dismissed, or (3) the time the debtor’s discharge is granted or denied.19 As to actions against property of the bankruptcy estate, the automatic stay lasts until the property is no longer property of the estate.20 Property is no longer property of the bankruptcy estate when the case is closed or sooner, if the trustee affirmatively abandons such property.21 The court also has the authority to lift or modify the stay upon motion of the creditor, as discussed below. Exceptions to the Automatic Stay Although the automatic stay is broad, there are some statutory excep- tions and the automatic stay does not prohibit all family law litigation or collection activity.22 In particular, the automatic stay does not apply to actions to determine paternity,actions to establish or modify a domestic support obligation, actions concerning child custody or visitation,or domestic violence actions.23 24 25 In addition, the automatic stay does not apply to an action to grant a divorce, to the extent such action does not also involve the division of property that is property of the bankruptcy estate.26 Whether the automatic stay applies to collection or enforcement of a domestic support obligation can be tricky.27 The exception cited above for actions involving domestic support obligations is only as to estab- lishment or modification of the obligation. A separate exception exists for collection of a domestic support obligation but only from property that is not property of the bankruptcy estate.28 In a chapter 7 case, the bankruptcy estate is generally limited to property held by the debtor at the time of filing, and efforts to collect a domestic support obligation from post-petition income or property do not implicate the automatic stay.29 However, in a chapter 13 case, the debtor’s post-petition income and all assets acquired post-petition are property of the bankruptcy estate, so efforts to collect a domestic support obligation from a chapter 13 debtor would likely be within the scope of the automatic stay.30 There are also statutory exceptions for several actions in support of collection of domestic support obligations: withholding income to pay a domestic support obligation pursuant to a judicial or administra- tive order or statute; withholding, suspending or restricting a license; reporting overdue child support to a consumer reporting agency; the interception of a tax refund; and the enforcement of a medical support obligation.31 Relief from the Automatic Stay A creditor may seek relief from the automatic stay in order to pursue a claim against the debtor.32 33 The court will grant relief from the stay where it finds there is adequate “cause.” The Bankruptcy Code does not define “cause,” giving the court broad discretion to determine whether cause exists to lift the stay on a case-by-case basis. Most motions for relief are filed by secured creditors seeking permis- sion to foreclose or repossess their collateral. However, in a case involving domestic issues, a motion for relief may be required to proceed with the divorce case, collect temporary support or otherwise provide more im- mediate relief to the non-debtor spouse.34 Completion of pending domestic relations matter in state court is often considered sufficient cause to grant relief from the stay.35 In a chapter 13 case, the bankruptcy court may be particularly willing to grant relief from stay to allow a state court to determine the debtor’s domestic support obligations. In In re Pidgeon, the bankruptcy court noted the circuitous problem of calculating the debtor’s income available to fund a chapter 13 plan, when the debtor’s non-dischargeable domestic sup- port obligation expense had yet to be determined in the pending divorce proceeding.36 The bankruptcy court granted relief to allow the divorce action to go forward, holding that only after the state court had entered a final order would the bankruptcy court be in a position to consider  24  New Hampshire Bar Journal Fall 2009 plan confirmation.37 A creditor seeks relief from stay by filing a motion for relief in the bankruptcy court along with a filing fee.38 The procedural requirements for filing and service of the motion are governed by Bankruptcy Rule 4001 and LBR 4001-1. Failure to comply with these procedural rules may result in the denial of the motion. The court will grant the motion without a hearing if counsel for the debtor files an assent or fails to object to a motion for relief at least seven days before the hearing date.39 Pro se debtors are excluded from this rule.40 41 Otherwise, a hearing on the motion will be held within 30 days. The initial hearing on a motion for relief may be preliminary in nature or it may be a final hearing.42 The parties explain their positions by offers of proof and the Court will either schedule the case for an evidentiary hearing or issue an order if the facts are not contested or the contested facts will have no effect on the court’s decision. The Court must generally enter a final order within 60 days, or the automatic stay will be lifted and the creditor may then proceed with collection efforts.43 Violations of the Automatic Stay The consequences for violating the automatic stay can be quite severe. If a creditor violates the automatic stay, even if the creditor was unaware of the bankruptcy, the collection action is voided.44 If the violation is willful, the debtor is entitled to an award of actual damages plus attorneys’ fees, and in appropriate cases, the court may even award punitive damages.45 A violation of the automatic stay is “willful” if the creditor “(1) has knowledge of the petition, and (2) the act which violates the stay was intentional.”46 The creditor need not intend to vio- late the automatic stay and the creditor’s good-faith belief that it has a right to certain property, or a right to take a certain action, is generally irrelevant.47 The automatic stay also imposes a duty on a creditor to return to the status quo when the creditor acts in violation of the automatic stay but without knowledge of the bankruptcy filing. Failure to return the status quo is also a willful violation.48 The debtor is also entitled to injunctive relief when necessary to return the status quo. For example, the debtor can seek an order compelling the creditor to return an asset seized in violation of the automatic stay. treAtment of dIvorce-relAted debtS In bAnkruptcy Even if a debtor is granted a general discharge of debts, certain debts may be excepted from discharge under Section 523 of the Bankruptcy Code.49 One commonly known exception to discharge in bankruptcy is student loans. In addition, domestic relations debts are often, but not always, nondischargeable.50 The treatment of domestic relations debts in bankruptcy involves the conflict of two established public policies. On one hand, “the pur- pose of the bankruptcy laws is to provide much needed relief from the burden of [the debtor’s] indebtedness by releasing him from virtually all his debts.”51 On the other hand, there is a long-standing public policy of recognizing and enforcing an individual’s duty to support family dependents.52 Accordingly, domestic relations debts are afforded special treatment in bankruptcy. Precisely how they are treated, however, is determined both by the characterization of the debt and whether the debtor is in a chapter 7 or a chapter 13 bankruptcy. The bankruptcy code distinguishes between two types of debts that may arise as the result of a divorce. The first type is a Domestic Support Obligation (DSO), statutorily defined in the Bankruptcy Code, as dis- cussed further below.53 All other debts that arise pursuant to a divorce or separation agreement and which are not a Domestic Support Obligation are considered to be ordinary debts owed to a former spouse. Section 523(a)(5) excepts DSOs from discharge, regardless of whether the debtor has filed a Chapter 7 or a Chapter 13 bankruptcy.54 Section 523(a)(15) excepts all other debts arising from a divorce or settle- ment agreement from discharge, but only in a chapter 7 bankruptcy.55 Thus, one of the key differences between a chapter 7 case and a chapter 13 case is the scope of the discharge.56 The debtor may obtain a broader discharge in a chapter 13 bankruptcy case, as only domestic relations debts which qualify as DSOs are excluded from the debtor’s chapter 13 bankruptcy discharge.57 As a result, if the debtor owes divorce-related debts, the type of bankruptcy case filed may have significant repercus- sions. DSOs are given preferential treatment in other ways too. In a chapter 7 case, if there are assets available for distribution to unsecured creditors, DSOs are entitled to be paid first among unsecured debts.58 This priority status does not apply if the DSO has been voluntarily assigned to a governmental unit for the purposes of collecting the debt.59 In a chapter 13 case, a DSO must be paid in full over the life of a chapter 13 plan, whereas ordinary debts owed to a former spouse are paid along with other non-priority unsecured debts, often with a minimal distribution under the chapter 13 plan.60 If the DSO has been assigned to a governmental unit, then the debtor may pay less than 100 percent of the 61 debt if all disposable income is paid into a five-year plan. In addition, the debtor’s post-petition payments on DSOs must be current in order for the bankruptcy court to confirm a Chapter 13 plan,62 and the debtor’s failure to keep such payments current during a pending Chapter 13 case is grounds for dismissal or denial of discharge upon plan completion.63 64 What is a Domestic Support Obligation? The term “Domestic Support Obligation” is defined in Section 101(14A) of the Bankruptcy 65 code. Essentially, there are four statutory requirements that must be satisfied for a debt to be characterized as a DSO. First, the debt must be owed to or recoverable by a spouse, former spouse, child, child’s parent or legal guardian, or a governmental entity.66 Note that the debt need not be directly payable to the above individuals, as long as it recoverable by one of them.67 One court has stated that a debt is recoverable, “if the right to payment of a person not within that class can be reduced to a monetary judgment or independently collected by a person within the class, for the benefit of the person within the class.”68 Accordingly, a debt awarded to the debtor-spouse in a divorce decree but payable to a third party creditor, such as a credit card company, may nev- ertheless be characterized as a DSO.69 In addition, a governmental entity that has provided support to the debtor’s dependent may hold a DSO, even though the other parent could not seek recovery of the debt.70  25  New Hampshire Bar Journal Fall 2009 Second, the debt must actually be in the nature of alimony, mainte- nance or support, regardless of how it is designated in the divorce decree or separation agreement.71 The critical issue in determining whether a debt is in the nature of alimony, maintenance or support is the purpose which the state court or the parties intended the payment to serve.72 The First Circuit has characterized domestic support payments, (payments in the nature of alimony, maintenance, or support) as “what is given to provide for the upkeep of the recipient spouse and children ... while other divisions or payments serve different purposes.”73 Whether an obligation to a former spouse is actually in the nature of support is a matter of federal law, and not state law, regardless of the labels attached to the debt by state law.74 Courts consider several factors in order to discern the purpose which the state court or the parties intended the payment to serve.75 The First Circuit has declined to establish a fixed set of standards determining which factors should be considered, because “[a]s in all fact-intensive queries, the critical factors depend on the totality of circumstances of a particular case.”76 However, the Bankruptcy Court for the District of New Hampshire has historically looked to three key factors: “(1) the language and substance of the agreement or order; (2) the relative financial circumstances of the parties at the time of the agreement or order; and (3) how the payment at issue is structured (e.g., whether it is a periodic or lump sum payment, or whether payment terminates upon the occurrence of a future contingent event).”77 Changes to the parties’ circumstances after the obligation was created are largely irrelevant to the analysis.78 Third, the debt must be established or subject to establishment based on provisions in a separation agreement, divorce decree, property settle- ment agreement, court order or determination of a governmental unit.79 The agreement or order need not contain a specific provision creating the obligation, as long as it gives rise to the obligation.80 For example, a state court determination such as a paternity order, even if the order itself does not provide for support obligations, is sufficient to give any support obligation arising out of the parental relationship status as a domestic support obligation.81 Finally, the debt must not be assigned to a nongovernmental entity, unless the obligee voluntarily assigned it in order to collect the debt.82 Dischargeability Complaints A determination of whether a particular debt is or is not discharge- able must be affirmatively sought from the bankruptcy court. A discharge- ability complaint under either Section 523(a)(5) or Section 523(a)(15) may be filed at anytime during the pending bankruptcy case.83 Either the creditor or the debtor may file a dischargeability complaint.84 However, the party seeking to have the debt determined nondischargeable generally bears the burden of proving by a preponderance of the evidence each element of the dischargeability exception.85 Federal bankruptcy courts and state courts have concurrent jurisdic- tion to make dischargeability determinations under sections 523(a)(5) and 523(a)(15) with respect to domestic relations debts.86 Because federal law controls, however, characterization of a debt as support by a state court prior to a bankruptcy filing will not be binding on the bankruptcy court. Nevertheless, the bankruptcy court may certainly give consideration to such characterization in making a dischargeability determination. In contrast, if the state court makes a determination as to the dischargeability of the debt after the bankruptcy filing, such de- termination will preclude re determination by the bankruptcy court.87 Discharge of Attorneys’ Fees Awards Attorneys’ fees incurred in enforcing a divorce related obligation generally follow the characterization of that obligation. In other words, if the underlying obligation was intended to serve as support, then the attorneys’ fees incurred in enforcing the obligation will also be consid- ered support. Therefore, fees awarded as a result of efforts to enforce a support obligation are frequently found to be non-dischargeable. 88 In In contrast, attorneys’ fees incurred to enforce a property settlement may be dischargeable. Where the attorneys fee award is part of the divorce or separation order (rather than a subsequent enforcement action), the bankruptcy court must determine whether the state court intended the award to serve the purpose of support. Even then, attorneys fees awarded are often found to be in the nature of support and non dischargeable, as they often result from the state court’s balancing the financial need of the parties.90 AvoIdAnceS Pre-bankruptcy transfers of interests in property (including security interests) may sometimes be avoided in bankruptcy in order to restore the bankruptcy estate to what it would have been absent the transfer. The occurrence of the transfer in the context of a divorce does not automati- cally immunize it from scrutiny as a possible avoidable transfer.91 One example of such avoidable transfers are “fraudulent trans- fers” under 11 U.S.C. §548, although a fraudulent intent is not always necessary. Specifically, the bankruptcy trustee can avoid a transfer made within two years preceding the bankruptcy filing, if (A) the transfer was made with actual intent to hinder, delay or defraud any current or future creditor; or (B) the debtor received less than reasonably equivalent value in exchange for the transfer, and the debtor was or became insolvent at the time of the transfer.92 The bankruptcy court has the power to review divorce decrees and settlements to determine whether they are avoidable as fraudulent transfers.93 In Sorlucco, the Bankruptcy Court for the District of New Hampshire focused on the “reasonably equivalent value” portion of the fraudulent transfer test. The court indicated that it would review divorce settlement agreements by making a “surface determination” that the division of marital property between the divorcing parties was within the range of likely distribution that would be ordered by the state divorce court if the property division had actually been litigated in that state court.94 The Bankruptcy Court will not review the divorce settlement de novo. As long as the property division was the result of arms-length bargaining and within the likely range of outcomes should the matter have gone to trial, the Bankruptcy Court will not disturb the settlement. In considering whether or not the property settlement is within the likely range of litigated outcomes, the Bankruptcy Court will consider factors that would lead a divorce court to award an unequal division of prop- erty. 95 Settlements on the eve of bankruptcy filing will be more closely scrutinized for potential fraud.96  26  New Hampshire Bar Journal Fall 2009 Another type of avoidable pre-bankruptcy transfer is a preferential transfer under 11 U.S.C. § 547. A preferential transfer or “preference” is a transfer by an insolvent individual to a creditor shortly before the individual files bankruptcy, which results in the creditor receiving greater payment on the creditor’s claim than if the transfer had not been made and the creditor had only been paid as part of the bankruptcy.97 The bankruptcy trustee has the authority to avoid such transfers and to require the creditor to disgorge the transferred property or payment so that it may be included in the bankruptcy estate.98 However, the trustee may not avoid preferential transfers that were payments on a domestic support obligation.99 On the other hand, payments made on other post-divorce domestic relations debts may be avoidable as preferential transfers.100 Section 522 allows the trustee or the debtor to avoid pre-petition judicial liens that impair the debtor’s exemptions.101 However, judicial liens that secure domestic support obligations are excepted from this provision.102 Finally, Section 549 allows the trustee to avoid transfers made without proper authority during a pending bankruptcy.103 prActIcAl SolutIonS Bankruptcy as a Solution to Marital Debt In cases where divorcing parties have significant joint debt (possibly including a mortgage on a home with little or no equity), one solution may be for one or both parties to consider filing a bankruptcy case to discharge their debts. This solution may allow the parties to resolve one of the significant issues in the divorce case without the need for litiga- tion. A routine chapter 7 bankruptcy case frequently involves legal fees between $1,000 and $2,000 and court filing fees of $299. This is likely less expensive than the cost of litigating the division of debts and will leave neither party at risk that the other party will default on his or her obligations under the divorce decree. If the divorce is not final, the parties have the option of filing a joint chapter 7 bankruptcy case or individual bankruptcy cases.104 Once the divorce is final, the parties must file individual bankruptcy cases.105 The primary advantage to filing a joint bankruptcy case, rather than two individual bankruptcy cases, is reduced legal fees for the bankruptcy case. Normally, the legal fees for a joint bankruptcy case are the same as an individual bankruptcy case, so a joint filing will save the couple half the legal fees. However, a joint bankruptcy case for separated parties should only be done in cases where the parties are able to fully cooperate towards the mutual goal of discharging their debts. Bankruptcy counsel con- templating representing a couple undergoing a divorce would be well advised to consider his or her obligations to the joint clients and the risks of a potential or actual conflict of interest.106 Even when the risk of a conflict of interest arising in the future is low, counsel should disclose to joint clients the risks and the consequences should a conflict arise. The clients should sign waivers asserting that they are unaware of any existing conflict of interest and understand the consequences of a conflict of interest arising in the future. In addition, each party should have their own divorce attorneys review the conflict waiver.107 If one or both parties decide to file bankruptcy prior to the final divorce decree, divorce counsel should be aware of the automatic stay, the potential need for relief from the bankruptcy court to continue with the divorce proceedings, and the possible impact of the bankruptcy on marital assets. If the parties anticipate post-divorce bankruptcy filings, the Per- manent Stipulations should reference such intentions, and divorce counsel should be cognizant of the fraudulent transfer provisions of the Bankruptcy Code. The following language is suggested as a starting point if the parties intend to file separate bankruptcy cases after the divorce becomes final: The parties intend to seek a discharge of their debts under the Bank- ruptcy Code after the entry of the final divorce decree. Therefore, neither party is ordered to pay the debts of the other party. Neither party shall be obligated to pay any joint debts. Neither party is entitled to defense or indemnification by the other party for any debts. The parties specifically agree that this provision shall govern in the event that one or both parties do not seek or do not receive a discharge of his or her debts and accept the risk of such an event. The parties further accept that one or both of the parties may choose to not file a bankruptcy case or may not receive a bankruptcy discharge in reaching the agreement regarding the award of alimony or child support (or lack of such award). EXCEPT: Jane Doe shall remain liable for the payment of the mort- gage of the parties’ former marital residence, ownership of which she is being awarded. Jane Doe shall defend and indemnify John Doe for any claim brought by the mortgage holder against John Doe. Bankruptcy as a Risk to Divorce Litigants If one of the parties is concerned that the other party may seek a bankruptcy discharge of joint debts, then there are a number of precau- tions that may be taken to mitigate this risk. Allocation of joint debts/assets. The most effective (but often not feasible) solution is to structure the divorce settlement so that the other party is not obligated to pay any joint debts. Counsel may want to have his or her client assume the joint debts in exchange for a disproportionate share of the assets. Similarly, counsel may also attempt to negotiate a resolution that calls for the sale of certain assets and the payoff of joint debts from the proceeds. 108 Characterization of debts. Another possibility is to structure the obligation as a domestic support obligation.109 As discussed above, in a chapter 7 case, all divorce-related debts are excluded from a debtor’s bankruptcy discharge. However, in a chapter 13 case, the bankruptcy discharge will discharge divorce-related debts except those that qualify as a domestic support obligation. Thus, counsel may seek to characterize the obligation to his or her client as a domestic support obligation. However, in doing so, counsel must remember that the bankruptcy court will look beyond the labels assigned by the parties or the state court. Thus, in order for the bankruptcy court to treat the debt as a non-dischargeable domestic support obligation, it will need to serve the purpose of support. Beyond the stated intent of the parties, indicia of support such as tax treatment, survival of death/remarriage, payment structure, etc. may help prove that the parties intended the payment to be a support obligation, rather than property division. Counsel would be wise to include hold-harmless language where any joint debt is assumed by the other party. This will ensure that the  27  New Hampshire Bar Journal Fall 2009 obligation will satisfy the “recoverable by” former spouse prong of the DSO test.110 Security interests. Another way to protect a client against the risk of a former spouse filing bankruptcy is through the use of a security interest. If the other party will be awarded an asset of significant value, the obligation to the client can be secured by that asset as collateral. Secured claims generally survive the bankruptcy discharge at least in regards to the in rem rights of the secured claim.111 In other words, while a bankruptcy can discharge the personal liability to pay the secured debt, the right of a secured creditor to proceed against the collateral survives the bankruptcy discharge. The security interest should be properly perfected or it will be subject to avoidance by the bankruptcy trustee.112 Counsel will need to balance the cost to the client of taking such protective steps against the risk of the opposing party seeking a bankruptcy discharge. Conditions precedent. A final way to protect a client from discharge of joint debt by a former spouse is to make payment of such debt a condi- tion precedent to award of marital assets.113 For example, if one spouse will be awarded the marital home and is responsible for payment of a joint mortgage, the divorce stipulation may provide that the marital home is awarded to both parties until the spouse in possession pays off or refinances the mortgage. However, a condition precedent must be clearly intended by the language used in order for the court to construe it as such.114 Bankruptcy as a Post-Divorce Solution (or Problem) Often the intersection of divorce and bankruptcy presents to either the family law attorney or the bankruptcy attorney after the divorce has been finalized. A client may come seeking relief from significant divorce- related debts that the client is no longer able to pay. Perhaps the client agreed to keep the marital home and pay the mortgage because a sale was anticipated that is no longer feasible as a result of the declining real estate market. Perhaps the client has recently become unemployed and can no longer pay the joint debts awarded to the client in the divorce decree. Bankruptcy may or may not be a solution for such a client. If the divorce attorney is unable to provide any family law solutions, referral to a bankruptcy attorney may be appropriate. Where there are divorce-related debts, counsel should be aware of the differences between the scope of the chapter 7 discharge and the chapter 13 discharge. As discussed above, if the debtor is attempting to discharge divorce related obligations, a chapter 13 case is the debtor’s only option. If those obligations may be considered domestic support obligations under the Bankruptcy Code, bankruptcy may not be the right solution. Counsel may also be presented with the client whose former spouse is failing to pay his or her divorce-related obligations and threatening to file bankruptcy or has already filed bankruptcy. Often the divorce stipu- lation or decree has not been drafted with the expectation of a possible future bankruptcy filing by one of the parties. Where the former spouse is in a precarious financial position, a contempt action may push him or her into filing bankruptcy. If a bankruptcy filing appears imminent, post-divorce counsel may better protect his or her client by seeking a stipulation that adopts some of the precautions discussed above. Where the former spouse has already filed bankruptcy, the options available are limited. The former spouse’s bankruptcy pleadings should be reviewed carefully to determine the proposed treatment of divorce- related debts. It may be appropriate to pursue collection in state court, but the scope and impact of the automatic stay must be kept in mind. The safest route before attempting to pursue an obligation owed by a debtor ex-spouse is to seek relief from the automatic stay in the bankruptcy court. Counsel may wish to oppose a proposed chapter 13 plan on the basis that it was filed in bad faith. Alternatively, counsel may file a dischargeability complaint seeking to have the client’s claim determined to be a domestic support obligation, and hence excluded from the debtor’s discharge.115 concluSIon The recent economic downturn and decline in the real estate mar- ket brings new challenges to those who represent clients in family law matters. Family law attorneys will need to be familiar with the potential solutions available to clients under the Bankruptcy Code, as well as the potential pitfalls. In appropriate cases, a chapter 7 bankruptcy filing by one or both of the parties may resolve some or all of the issues in a divorce case. When negotiating a settlement of the divorce case or submitting a proposed order to the Court, counsel should also be aware of the possibility of a bankruptcy filing by the other party, and the effect such a filing may have on the client. Post-divorce, the Bankruptcy Code still offers relief to debtors who are unable to pay certain divorce related obligations, particularly through a chapter 13 bankruptcy filing. If the debtor owes non-domestic support obligation debts, a chapter 13 bankruptcy may allow the debtor to obtain relief from those debts. Counsel representing the creditor spouse will need to be aware of the limitations imposed by the automatic stay and the scope of the discharge available to the debtor under chapter 7 and chapter 13 of the Bankruptcy Code. endnoteS 1 In June 2009, 346 Chapter 7 cases were filed in the District of New Hampshire. Of these, only 43 had non-exempt assets available for liquidation and distribution to pay unsecured creditors. See NH Bankruptcy June Totals, located at http://www.nhb.uscourts.gov/Public_Notices/statistics. html. 2 The means test is a two part test. The first part of the test determines whether the debtor’s annualized Current Monthly Income (CMI) for the debtor’s household size is above or below the median household income for the debtor’s household size for the state the debtor resides in. If the debtor’s annualized CMI is less than the state median household income for the debtor’s household size, the debtor passes the means test and his or her case is presumed to not be an abuse of the bankruptcy code. If the debtor’s annualized CMI is higher than the median household income for the debtor’s household size, the debtor must complete the second part of the Means Test, the “long form,” to determine his or her ability to pay creditors. This long form allows the debtor to deduct certain expenses from the debtor’s CMI to determine whether the debtor has a meaningful ability to pay his or her creditors. If so, the debtor fails the means test and is presumptively not eligible to file a chapter 7 bankruptcy case. 3 11 U.S.C. §§ 1322, 1325. 4 11 U.S.C. §101(10A). Social security benefits and certain unusual forms of income are excluded from income for purposes of the Means Test. 5 11 U.S.C. § 1322(d). 6 See Official Bankruptcy Forms B22A, B22C. 7 11 U.S.C. § 707(b)(7)(B). 8 11 U.S.C § 707(b). Note however, that voluntary support payments cannot be deducted on the Means Test. 9 11 U.S.C. §§ 1321 and 1322.  28  New Hampshire Bar Journal Fall 2009 10 11 U.S.C. §§ 1322(b)(3) and (5). 11 In re Beeman, 235 B.R. 519 (Bankr. D.N.H. 1999). 12 See In re Carol Center, 282 B.R. 561 (Bankr. D.N.H. 2002). 13 11 U.S.C. § 524(a). 14 See 11 U.S.C. § 522(c)(2). 15 See 11 U.S.C. § 524(e). 16 11 U.S.C. § 362(a). 17 11 U.S.C. § 362(a). 18 11 U.S.C. § 362(a). 19 11 U.S.C. § 362(c)(2). 20 11 U.S.C. § 362(c)(1). 21 11 U.S.C. § 554. 22 11 U.S.C. § 362(b)(2)(A)(i). 23 11 U.S.C. § 362(b)(2)(A)(ii). 24 11 U.S.C. § 362(b)(2)(A)(iii). 25 11 U.S.C. § 362(b)(2)(A)(v). 26 11 U.S.C. § 362(b)(2)(A)(iv). 27 The term “domestic support obligation,” which is statutorily defined, is discussed further below. 28 11 U.S.C. § 362(b)(2)(B). 29 See 11 U.S.C. § 541(a); In re Pidgeon, 155 B.R. 24, 26 (Bankr. D.N.H. 1993). 30 See 11 U.S.C. § 1306(a); In re Pidgeon, 155 B.R. 24, 26 (Bankr. D.N.H. 1993). 31 11 U.S.C. § 362(b)(2)(B)-(G). 32 11 U.S.C. § 362(d). 33 11 U.S.C. § 362(d)(1). 34 See In re Pidgeon, 155 B.R. 24, 26 (Bankr. D.N.H. 1993). 35 See e.g., In re Pidgeon, 155 B.R. 24 (Bankr. D.N.H. 1993) (granting relief to allow non- debtor spouse to proceed with pending state court divorce action). 36 In re Pidgeon, 155 B.R. 24, 26-27 (Bankr. D.N.H. 1993). 37 In re Pidgeon, 155 B.R. 24, 27 (Bankr. D.N.H. 1993). 38 The filing fee for a motion for relief is currently $150.00, and may be waived for child support creditors. 39 See LBR 4001-1 and LBR 7102. 40 See LBR 4001-1(e). 41 11 U.S.C. § 362(e). 42 11 U.S.C. § 362(e). 43 11 U.S.C. § 362(e). 44 See In re Soares, 107 F.3d 969, 976 (1 Cir. 1997). 45 11 U.S.C. § 362(k)(1). 46 Putnam v. Rymes Heating Oils, Inc. (In re Putnam) , 167 B.R. 737, 740 (Bankr. D.N.H. 1994). 47 In re Schafer, 315 B.R. 765, 774-775 (Bankr. D. Colo. 2008). But see, 11 U.S.C. § 362(k)(2) (limiting damages to actual damages if certain stay violations are based on actions taken in good faith belief that a debtor has not timely filed, and acted upon, a statement of intention regarding personal property). 48 In re Carrigg, 216 B.R. 303 (1st Cir.BAP 1998) (sanctioning creditor for failing to return truck repossessed after the bankruptcy filing, but without knowledge of the bankruptcy filing.) 49 11 U.S.C. § 523. 50 11 U.S.C. §523(a)(8). 51 In re Shine, 802 F.2d 583, 585 (1 Cir. 1986) (internal citation omitted). 52 In re Shine, 802 F.2d 583, 585-586 (1 Cir. 1986); In re Werthern, 329 F.3d 269, 272 (1 Cir. 2003). 53 See 11 U.S.C. § 101(14A). 54 11 U.S.C. § 523(a)(5). 55 11 U.S.C. § 523(a)(15). 56 Compare 11 U.S.C. §523(a) with §1328(a). 57 11 U.S.C. §1328(a)(2). 58 11 U.S.C. § 507(a)(1). 59 11 U.S.C. § 507(a)(1)(B). 60 11 U.S.C. §§ 507(a)(1) and 1322(a)(2). 61 11 U.S.C. § 1322(a)(4); In re Williams, 387 B.R. 211 (Bankr. N.D. Ill. 2008). 62 11 U.S.C. § 1325(a)(8). 63 11 U.S.C. § 1307(c)(11). 64 11 U.S.C. § 1328(a). 65 11 U.S.C. § 101(14A). Prior to BABCPA, the term “domestic support obligation” did not exist in the Bankruptcy Code. Rather, Section 523(a)(5) simply excepted from discharge debts owed “to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record” as long as the debt was actually in the nature of alimony, maintenance or support. 11 U.S.C. § 523(a)(5) (2004). It is believed that the adoption of the term “domestic support obligation” was not intended to alter the exception and that most pre- BABCPA caselaw remains applicable. 66 11 U.S.C. § 101(14A)(A). 67 11 U.S.C. § 101(14A)(A). 68 In re Watson, 402 B.R. 294, 299 (Bankr. N.D. Ind. 2009). 69 See e.g., In re Poole, 383 B.R. 308, 313 (Bankr. D.S.C. 2007); In re Johnson 2008 WL 553221 (Bankr. M.D. N.C. 2008). 70 11 U.S.C. § 101(14A)(A). 71 11 U.S.C. § 101(14A)(B). 72 In re Werthen, 329 F.3d at 273; Baroody v. Baroody (In re Baroody), 2007 BNH 009 (unreported). 73 In re Werthen, 329 F.3d at 273. See also In re Smith, 398 B.R. 715, 721 (B.A.P. 1st Cir. 2008). 74 See In re Werthen, 329 F.3d 269, 272-3 (1 Cir. 2003); Peterson v. Peterson (In re Peterson), 292 B.R. 228, 231 (Bankr. D.N.H. 2003). 75 In re Werthen, 329 F.3d at 273. 76 See In re Smith at 272. 77 In re Baroody, 2007 BNH 009, at 5-6. 78 See Hale, 289 B.R. at 791; In re Savoy, 2006 BNH 028, at 5. 79 11 U.S.C. § 101(14A)(C). 80 See In re Shine, 802 F.2d 583 (1 Cir. 1986). 81 See e.g., Cain v. Isenhower (In re Cain), 29 B.R. 591 (Bankr.N.D.Ind.1983); Mullally v. Carter, 67 B.R. 535 (N.D.Ill.1986). 82 11 U.S.C. § 101(14A)(D). 83 See Fed. R. Bankr. P. 4007(b). 84 Fed. R. Bankr. P. 4007(a). 85 In re Richmond, 351 B.R. 6, 10 (Bankr. D. N.H. 2006); Savoy v. Savoy (In re Savoy) , 2006 BNH 028 (unreported); Putney v. Putney (In re Putney), 2004 BNH 019 (unreported) (finding that creditor-spouse failed to satisfy burden of proof to establish nondischargeability of marital debt, where language of divorce decree clearly labeled debt as property settlement and creditor-spouse presented no contradictory evidence or testimony). 86 See 11 U.S.C. § 523(c). 87 In re Monsour, 372 B.R. 272, 278 (Bankr. W.D. Va. 2007) (holding debtor could not relitigate issue of dischargeability under 523(a)(5) where state court had already held the debt nondischargeable in post-bankruptcy proceedings). 88 See Macy v. Macy, 114 F.3d 1 (1 Cir. 1997); In re Peterson, 292 B.R. 228 (Bankr. D. N.H. 2003). 89 See In re Soforenko, 203 B.R. 853, 862 (Bankr. D. Mass. 1999); In re Baroody, 2007 BNH 009 (finding that attorneys fee award in divorce stipulation was nondischargeable as a debt in the nature of alimony, maintenance or support because the purpose of the award was to allow the creditor-spouse to refinance the mortgage and ease the burden of maintaining the marital residence and supporting the minor child). 90 See e.g., In re Joseph , 16 F.3d 86 (5 Cir. 1994). But see, In re Savoy, 2006 BNH 028 (finding that attorneys fees did not fall within the exception to discharge for debts in the nature of alimony, maintenance or support where separate provisions were clearly made for alimony and child support and parties had negotiated payment of attorneys fees after all other provisions of divorce decree were settled). 91 See In re Sorlucco 68 B.R. 748, 753 (Bankr. D.N.H. 1986).  29  New Hampshire Bar Journal Fall 2009 92 11 U.S.C. §548(a)(1). 93 See In re Sorlucco 68 B.R. 748, 753 (Bankr. D.N.H. 1986). 94 See In re Sorlucco 68 B.R. 748, 753 (Bankr. D.N.H. 1986). 95 In re Riso, 102 B.R. 280 (Bankr. D.N.H. 1989). 96 In re Sorlucco 68 B.R. 748 (Bankr. D.N.H. 1986). 97 11 U.S.C. § 547(b). 98 11 U.S.C. § 547(b). 99 11 U.S.C. § 547(c)(7). 100 But see, In re Skorich, 337 B.R. 441 (Bankr. D.N.H. 2006) (holding that transfer of funds into escrow during pending divorce was not an avoidable preference because debtor’s spouse did not become a creditor until final divorce decree was entered). 101 11 U.S.C. § 522(f). 102 11 U.S.C. § 522(f). 103 11 U.S.C. § 549. 104 A joint chapter 13 case would not be advisable for divorcing parties, as this is a long term bankruptcy (three to five years). 105 Only married couples may file a joint bankruptcy case.11 U.S.C. §302. 106 N.H. Rule of Professional Conduct 1.7. 107 These authors would never represent a divorcing couple in a bankruptcy case unless each party had divorce counsel. The author is aware that there are bankruptcy attorneys who believe that one should never file a joint bankruptcy case for a couple undergoing a divorce under any circumstances. Bankruptcy counsel should also explicitly delineate the scope of his or her representation in writing (either in the fee agreement or in a separate document signed by the clients). 108 Note, however, that the New Hampshire Supreme Court has held that the trial court lacks the authority to order a sale of the parties’ marital assets to pay marital debts. In re Beal, 153 N.H. 349, 350-351 (2006). 109 Protection against discharge in the event of possible bankruptcy must be weighed against the negative consequences of characterization as support, such as potential for subsequent modification and taxable income. 110 11 U.S.C. § 101(14A)(A). 111 11 U.S.C. § 522(c)(2). 112 See 11 U.S.C. § 541. 113 See e.g., Sommers v. Sommers, 143 N.H. 686 (1999). 114 See Sommers v. Sommers, 143 N.H. 686, 692 (1999) (holding that language in divorce stipulation awarding vehicle to husband, but providing that title would transfer only upon payment of marital debts created a security interest rather than a condition precedent). 115 See e.g., In re Smith, 398 B.R. 715, 721 (B.A.P. 1st Cir., 2008). Authors Mark P. Cornell is a partner in the law firm of Cornell and Ovitt Puc PLLC in Concord. Kelly Ovitt Puc is a partner in the law firm of Cornell and Ovitt Puc PLLC in Concord. Mark P. Cornell Kelly Ovitt Puc 4 Reasons to Take a DOVE Case “A lawyer is often the domestic violence victim’s last best hope for protection.” Attorney Donald F. Hebert “One reason many of us went to law school was the prospect of representing the downtrodden and abused.  at is exactly what the DOVE cases involve. I fi nd it very rewarding to spend some time helping someone who has been abused and has no real chance without our help.” Attorney Jack B. Middleton “As lawyers, we have a unique opportunity to help vulnerable people. DOVE is a great program that enables lawyers to advocate for survivors and have an immediate and positive impact.” Attorney David L. Nixon “DOVE provides the opportunity for me to provide short-term service to the victims of domestic violence at a time when they need help and support the most.” Attorney Kysa Crusco For more information contact Pam Dodge, DOVE Project, 2 Pillsbury Street, Suite 300, Concord, NH 03301 or call Pam Dodge @224-6942 Ext. 3230 or email pdodge@nhbar.org