BANKRUPTCY (13 QUESTIONS)

Question 1

What does BAPCPA stand for?

Answer 1

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

Question 2

What cases does the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 apply to?

Answer 2

Applies only to bankruptcy cases filed on or after October 17, 2005.

Question 3

What does the term “Domestic Support Obligation” (“DSO”) mean?

Answer 3

The term “Domestic Support Obligation” (“DSO”) means a debt that accrues before, on or after the date of the order for relief in a case, including interest that accrues on a debt that is:
A. Owed to or recoverably by a spouse, former spouse or child of the debtor or such child’s parent, legal guardian or responsible relative, or a governmental unit.

B. In the nature of alimony, support (including assistance provided by a governmental unit) regardless if such debt is expressly designated

C. Established or subject to establishment before, on or after the date of the order for relief by a separation agreement, divorce decree or property settlement agreement, court order, or a determination 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, child’s parent, legal guardian or responsible relative for the purpose of collecting the debt.

Question 4

What did the BAPCPA eliminate?

Answer 4

The BAPCPA eliminates the distinction between orders providing for division of property vs. orders providing for support, so that nearly all obligations to a spouse, former spouse or child of a debtor incurred in connection with a divorce or separation agreement or other family law related order are not discharged in a case under any chapter of the bankruptcy code.

Question 5

-How are non support obligations dealt with under BAPCA?

Answer 5

Under the BAPCPA, non-support obligations are placed in parity with support obligations

Question 6

What is a chapter 7 filing

Answer 6

Liquidation Under the Bankruptcy Code

Question 7

what is a chapter 11 filing

Answer 7

Reorganization Under the Bankruptcy Code

Question 8

What is a chapter 12 filing

Answer 8

Family Farmer Bankruptcy or Family Fisherman Bankruptcy

Question 9

what is a chapter 13 filing

Answer 9

Individual Debt Adjustment

Question 10

Explain difference between Chapter 7, 11, 12 and 13 bankruptcy

Answer 10

CHAPTER 7 - most common type of personal bankruptcy - liquidation of non exempt assets occurs to pay creditors & income must be below a certain amount

Chapter 11 -reorganization for businesses no income requirements and there is a repayment plan

chapter 13 - repayment plan for individuals and debt must be below a certain amount

chapter 12 - used for a family farmers and fisherman

Question 11

What do non support obligations include?

Answer 11

Non-support obligations include equitable distribution payments, lump sum distributions and payments, credit card and charge account obligations, mortgage and HELOC payments, HOA dues, income tax obligations, auto loan payments, indemnification and hold harmless payments, medical bills, attorney’s fees obligations unrelated to the divorce, and sanctions for contemptuous conduct.

Question 12

What is one exception to treating non-support obligations with support obligations is in Chapter 13 cases under 11 USC §523(a)?

Answer 12

When the debtor has made all payments required under the confirmed Chapter 13 plan (i.e the case plan is completed).

Question 13

What must a debtor do after completion of a Chapter 13 plan?

Answer 13

After completion of a Chapter 13 plan, a debtor must certify that post-filing DSO payments are current in order to receive a discharge (however, the plan can provide for payment of less than all pre-filing obligations to the DSO creditor if all of the debtors protected disposable income is devoted to the plan for a 5-year-period).

Question 14

Are property division and nonsupport orders for the benefit of the spouse (such as hold harmless orders excepted from discharge?

Answer 14

Yes

Question 15

Why is it important to distinguish between support and nonsupport obligations?

Answer 15

In chapter 7, 11 & 12 debts stemming from domestic support orders AND other non support orders are EXCLUDED from discharge but in a chapter 13 while domestic support orders can’t be discharged NON domestic support orders can be discharged

Therefore, it is still important to distinguish between support and nonsupport obligations to preclude discharge of nonsupport obligations in Chapter 13 case, and to consider the possibility of a party filing for bankruptcy under Chapter 13.

Question 16

Can a debtor successfully discharge a divorce related non-DSO?

Answer 16

If the debtor manages to propose and complete a Chapter 13 plan, the debtor could successfully discharge a divorce related non-DSO

Question 17

What factors are considered to determine if debt is in the nature of support?

Answer 17

(1) the substance and language of document in question;
(2) the financial condition of the parties at the time of the agreement;
(3) the function served by the obligation and intent of the parties.

Question 18

Is case law prior to the 2005 still applied in determining if an obligation is support in nature?

Answer 18

Case law prior to the 2005 Act is still applicable in determining if the obligation is in the nature of support.

Question 19

Does federal or state law govern whether an obligation is part of a Domestic Support Obligation

Answer 19

Whether an obligation i.e. what constitutes alimony, maintenance or support) is determined under federal bankruptcy law, and not state law. But, the federal bankruptcy court may look to state law for guidance.

Question 20

If an agreement does not have an alimony provision, can there be a finding of a domestic support obligation?

Answer 20

The court can still hold the debtor’s obligation to be a DSO.

Question 21

Is an adversary proceeding required in order to obtain a finding as to whether a family law debt is dischargeable?

Answer 21

Another change by this rule is an adversary proceeding is no longer required to obtain a finding as to the dischargeability of a family law related debts.

The exception is now automatic and no longer requires the creditor to file an adverse proceeding to secure an exception of his or her debt to discharge, and allows debtor’s exempt property to be used to pay support obligations.

Question 22

Does a domestic support obligation have priority?

Answer 22

DSO is entitled to 1st priority so that obligation to repay is behind only certain administrative expenses allowed by the trustee

Question 23

What is included under the estate and the trustee provisions of the act

Answer 23

The estate includes property recovered by trustee by avoidance of preference payments, fraudulent transfers, property recovered under powers of avoidance granted to trustee as a lien creditor, and any interest in property which debtor becomes entitled within 180 days of filing the petition by inheritance through property settlement in divorce or legal separation or as a beneficiary of life insurance

Question 24

Who is the representative of the estate?

Answer 24

The Trustee

Question 25

When can a trustee recover money or property under trustee’s avoiding powers?

Answer 25

Trustee may recover money or property under trustee’s “avoiding powers” to set aside preferential transfers made to certain creditors within 90 days before the petition was filed or 1 year if the creditor was an insider (such as a spouse).

Question 26

What is it also known as when a trustee may recover money or property under trustee’s “avoiding powers” to set aside preferential transfers made to certain creditors within 90 days before the petition was filed or 1 year if the creditor was an insider (such as a spouse).

Answer 26

Look back period

Question 27

What is a preference payment

Answer 27

A preference payment is generally one that is (l
(1) to or for the benefit of a creditor (2) for an antecedent debt;
(3) within 90 days before petition filed (Trustee may recover money or property under trustee’s “avoiding powers” to set aside preferential transfers made to certain creditors within 90 days before the petition was filed or 1 year if the creditor was an insider (such as a spouse). days before the petition was filed (or 1 year if the creditor was an insider) and

(4) which enabled the creditor to receive more than it would have received if the transfer had not been made.

Question 28

What certain preferences are not avoidable?

Answer 28

Certain preference payments are not avoidable, including bona fide payments of a debtor for at DSO and payments made for a contemporaneous exchange of value.

Question 29

When may a trustee avoid transfers?

Answer 29

Trustee may also avoid transfers:

(1) made within 2 years of filing petition if made with actual intent to hinder, delay or defraud creditors;
(2) made within 2 years of filing petition for less than reasonably equivalent value when debtor was insolvent or transaction rendered the debtor insolvent; or
(3) made within 4 years prior to file if deemed fraudulent.

Question 30

What is an automatic stay?

Answer 30

Automatic stay in bankruptcy is the period of time where all judgments, collection activities, etc. are suspended and may not be pursued by creditors on any debt or claim that arose before the filing of the bankruptcy petition.

Question 31

What types of actions do automatic stays not apply?

Answer 31

The automatic stay does not apply to: paternity actions, modifications, or establishment of DSOs, actions for child custody or visitation, domestic violence proceedings, actions for dissolution of marriage, income withholding, or interception of a tax refund.

Question 32

What may also be exempt from an automatic stay?

Answer 32

Property determinations regarding the non-bankruptcy spouse’s interest in the debtor’s retirement assets may also be exempt from the automatic stay (i.e. QDRO was not stayed since interest in retirement fund vested at the time divorce judgement was entered).

Question 33

When may the automatic stay apply in divorce actions?

Answer 33

The automatic stay may apply solely to divorce actions where the nonfiling spouse is seeking to divide property of the estate as an equitable division of property, since the stay remains in effect regarding the determination of property issues BUT you can always file a motion to lift the stay

Question 34

Are division and valuation of property and enforcement of property settlement agreements carved out exceptions to the automatic stay?

Answer 34

NO

Question 35

What happens if division and valuation of property and enforcement of property are necessary for an award of support?

Answer 35

If resolution of these issues is necessary for an award of support, the stay does apply and relief from the stay is required

Question 36

What are the new prerequisites to filing under Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)

Answer 36

1. Credit Counseling
2. Chapter 7 Means Test
3. Remaining Current on Support for Chapter 13
4. Automatic Stay
5. Discovery

Question 37

Under the New Prerequisites to Filing under BAPCPA, what is required under credit counseling

Answer 37

Debtor must attend credit counseling program (about 1 hour) by a US Trustee approved program and file certificate of credit counseling completion with petition. At credit counseling they will go over finances and discuss alternatives to bankruptcy, and develop a budget for debtor. A bankruptcy petition will be struck if they don’t attend credit counseling before filing.

Question 38

What is the chapter 7 means test

Answer 38

Debtor must first pass the means test, which if debtor’s monthly income is lower than median income for the state of her residence she is eligible for Chapter 7. If her income is greater, a formula is applied which looks at whether debtor has sufficient disposable income after paying certain allowed monthly expenses to satisfy a portion of unsecured debt, and then compare her disposable income to the state median. If the disposable income exceeds the state median then the debtor fails the means test and cannot file for Chapter 7.

Question 39

What does it mean that you have to remain current on support for chapter 13?

Answer 39

A party filing for bankruptcy under Chapter 13 must remain current in his support obligation. A debtor’s failure to pay any DSO that first becomes payable after the date of filing the petition is now grounds for dismissal.

Question 40

What is an automatic stay

Answer 40

Expanded the exceptions to the automatic stay upon the filing of bankruptcy.

Question 41

What is needed under discovery requirement

Answer 41

Debtor must produce their most recent tax returns, pay stubs, any interest in educational IRAs or qualified State tuition programs. Debtor must also take an instructional course concerning personal financial management and file certificate with the court prior to the entry of discharge

Question 42

What is a debtor called upon to do under Chapter 7?

Answer 42

A debtor is called on to liquidate her nonexempt property and the proceeds of the sale are then distributed to the debtor’s creditors.

Also, under the BAPCPA, the Chapter 7 trustee may be able to sell exempt property (i.e. a debtors homestead) to pay past due DSOs.

Question 43

What is the Chapter 7 Means Test?

Answer 43

Debtor must first pass the means test, which if debtor’s monthly income is lower than median income for the state of her residence she is eligible for Chapter 7.

If her income is greater, a formula is applied which looks at whether debtor has sufficient disposable income after paying certain allowed monthly expenses to satisfy a portion of unsecured debt, and then compare her disposable income to the state median. If the disposable income exceeds the state median then the debtor fails the means test and cannot file for Chapter 7.

Question 44

What is often the case in chapter 7 proceedings with debtors assets?

Answer 44

Often the debtors assets are either exempt from bankruptcy or subject to liens, and the trustee files a “no asset” report with the court, leaving no distribution to unsecured creditors.

Question 45

Once a trustee liquidates non exempt assets, what can they do under their avoiding powers

Answer 45

Trustee liquidates non-exempt assets and may also recover money or property under trustee’s “avoiding powers” to set aside preferential transfers made to certain creditors within 90 days before the petition (i.e. look back period), undo security interests and other pre-petition transfers of property that were not properly perfected under nonbankruptcy law at the time of the petition (trustee can no longer treat payments towards DSOs as a “preferential transfer” and are protected from preference avoidance suits.

Question 46

What must a trustee do when there is a child support obligation

Answer 46

Trustee must notify the holder of a claim for a DSO of his/her right to use the state child support agency to collect child support

Question 47

What must the trustee do if discharge is granted if there is a child support obligation

Answer 47

Trustee must notify the state child support agency of debtor’s address, last known employer, the granting of the discharge and any creditors no discharged or reaffirmed

Question 48

Under chapter 7 who is a first priority lienholder

Answer 48

Holder of DSO is now designated as a first priority lienholder.

Question 49

Is earned income of a debtor property of the debtor’s estate in chapter 7?

Answer 49

Earned income of the debtor is NOT property of the debtor’s bankruptcy estate in Chapter 7 cases (in Chapter 12 and 13 courts are divided on this issue, but in Chapter 11 earned income is part of the debtor’s estate).

Question 50

IS earned income of the debtor part of the debtors estate in chapter 11?

Answer 50

Chapter 11 earned income is part of the debtor’s estate

Question 51

What can take place in a look back period

Answer 51

Creditor may petition court to revoke a discharge in bankruptcy if obtained by fraud and requesting party didn’t know until after discharge granted

Question 52

When does fraud occur

Answer 52

Fraud occurs where debtor transferred property with either actual intent to hinder a creditor or for less than a reasonably equivalent value.

Question 53

When may a creditor petition to revoke discharge based on fraud

Answer 53

Creditor may only petition if fraudulent transfer took place within 1 year of the discharge in bankruptcy

Question 54

What is chapter 11 bankruptcy?

Answer 54

• Often referred to as “reorganization.”
• Debtor’s partnership or corporation will propose a plan for reorganization to keep business going and allow it to repay creditors over time.
• Does not involve individual debtors and since partnerships and corporations rarely owe a DSOs.
• In Chapter 11 earned income of the individual debtor is part of the debtor’s estate
• In order for the debtor to have a Chapter 11 plan confirmed, the debtor must have paid all amounts payable under a DSO after the filing of the bankruptcy case. A DSO creditor has the power to require payment in full on the effective date of the plan.

Question 55

How does Chapter 11 treat earned income

Answer 55

In Chapter 11 earned income of the individual debtor is part of the debtor’s estate

Question 56

What must a debtor do in order to pursue a chapter 11 bankruptcy?

Answer 56

In order for the debtor to have a Chapter 11 plan confirmed, the debtor must have paid all amounts payable under a DSO after the filing of the bankruptcy case. A DSO creditor has the power to require payment in full on the effective date of the plan.

Question 57

What is a chapter 12 bankruptcy?

Answer 57

Designed to provide relief to “family fisherman” or “family farmers” but bears noting that all DSOs MUST be satisfied prior to discharge.

Question 58

What must a party make sure to do in order to obtain a chapter 13 bankruptcy

Answer 58

A party filing for bankruptcy under Chapter 13 must remain current in his support obligation

Question 59

What if a debtor isn’t current in his support obligation after filing for bankruptcy, what can happen?

Answer 59

A debtor’s failure to pay any DSO that first becomes payable after the date of filing the petition is now grounds for dismissal.

Question 60

What kind of plan is developed under chapter 13?

Answer 60

A plan is developed which will allow individual debtor to repay all or part of her debts. Generally, debtor will develop a plan which she repays creditors over the course of 3 to 5 years.

Question 61

What is one benefit of filing under chapter 13

Answer 61

One benefit under Chapter 13 is if the proposed plan is accepted and followed, the debtor is afforded the opportunity to retain his residence

Question 62

What happens once all payments are made under chapter 13 plan?

Answer 62

After all payments are made under Chapter 13 plan, the debtor is entitled to a discharge of any remaining debts

Question 63

What must a debtor do prior to discharge under chapter 13?

Answer 63

Prior to the discharge, the debtor must certify:
(A) that all DSOs that came due prior to making the certification have been satisfied;
(B) that she has not received a discharge in a prior case filed within the last 2 to 4 years (i.e. debtor must not have received a Chapter 7, 11, or 12 discharge in 4 years or 13 discharge in 2 years); and
(C) that she has completed an approved financial management course

Question 64

What risk does a debtor have under chapter 13 if they don’t stay current on their DSO through date of filing the certification?

Answer 64

The debtor must be current on the DSO up to the date of filing the certification and remain current or risk having his residence sold to satisfy the DSO

Question 65

Can a non-debtor spouse be awarded the former marital home under chapter 13?

Answer 65

• There may come a situation where a non-debtor spouse is awarded the former marital residence, but the home remains in the name of the debtor spouse that files for bankruptcy under Ch 13. In this scenario, the debtor spouse would need to have his plan accepted by the Trustee by certifying DSO are current to save the residence. The non-debtor spouse may have a stronger interest in preserving the residence than in preserving her support award. The question lies whether the non-debtor spouse can even waive his or her right to have the debtor certify the support is current or waive her support altogether. If it is child support, then child support cannot be waived but if it is spousal support, there is a strong argument to permit the nondebtor spouse the opportunity waive support in favor of saving the house.

Question 66

What have courts determined are in the nature of support

Answer 66

-child support arrearages;
-college expenses;
-GAL fees;
-life insurance;
-medical expenses;
-mortgage payments

Question 67

What is the role of a family law practitioner in a bankruptcy action?

Answer 67

1. Review and compare bankruptcy schedules and disclosures with client’s and adversary’s financial disclosure since it might reveal assets the debtor “overlooked” on his financial statements
2. Attend the Section 341(a) creditors meeting. The debtor has to answer questions under oath and you should look for any inconsistencies between the bankruptcy action and family law action.
3. It is also important to be mindful and aware of debtor’s sworn testimony because this may impact the positions you take in the family action.
4. Since discharge of 523(a)(15) marital debts are allowed if filing under Chapter 13 to debtors who obtain and completed confirmed planned payments to discharge, the family law attorney will want to object to the debtor’s plan, and if possible file a compliant to determine if the debts is a nondischargeable DSO under 523(a)(5).
5. Attorney in family case also must be aware of her client’s economic situation and cannot counsel a client to incur more debt when knowing the reason for the advice is the anticipation of bankruptcy. That is because family law attorneys could fall within the umbrella of a “debt relief agency” since they receive money for providing advice, and debt relief agencies are prohibited from advising a client to incur more debt in contemplation of a bankruptcy filing.
6. The rub occurs when the family law practitioner encounters a set of circumstances in which the counsel is necessary to secure the child’s best interest, yet this advice will expose the attorney to liability under the BAPCPA. The chilling effect of these restrictions on giving this advice has been challenged in Federal District Courts and found unconstitutional limitation of free speech. So the US Supreme Court has said professionals may provide reasonable financial advice to client but they are constrained from “advising an assisted person to incur more debt when the impelling reason for the advice is the anticipation of bankruptcy.
7. Family lawyer must review state and federal law regarding property of the bankrupt estate to see what is exempt since debtor may claim exemptions under state or federal law unless state has “opted out” of federal exemptions.
8. Family lawyer must take steps to protect her client’s jointly held property from liquidation whether a debtor spouse is eligible Chapter 7 bankruptcy, since jointly held interest with the debtor that is under sole or equal management with the debtor are liable for an allowable claim against the debtor.
9. Lawyers representing debtors beware – if claims for creditors holding a DSO are NOT filed by the debtor, then the claimant will not share in any distribution from the bankruptcy estate and 100% of the debt will survive the debtor’s discharge.
10. Because of potential for a transfer between a debtor spouse and a nondebtor spouse to be deemed fraudulent, lawyers must include protective explanatory language in MSAs that make it clear the obligation will not be dischargeable in bankruptcy in the future. Pre-bankruptcy agreements may be challenged as a fraudulent conveyance if they contain no reasonably equivalent consideration or where an intent exists to delay or defraud creditors.
11. A law firm is not an entity to which a DSO could be owed for purposes of the exception to discharge of DSO in a Chapter 7 proceeding. Therefore, family law attorneys must see that attorney’s fee awards are deemed recoverable by their client and not by the firm itself.
12. Also, divorce lawyers should be wary of representing a debtor in a pending bankruptcy case since the attorney must be actually employed as special counsel in the bankruptcy case for a professional to be paid for representing a debtor from the bankruptcy estate. The bankruptcy court reviews the fees and the fees may or may not be payable form the bankruptcy estate.
13. Another concern is for the non-filing spouse where the property is solely owned by the debtor, since courts struggle with what interest the nonfiling soon-to-be ex-spouse has in the bankruptcy estate property. The nonfiling spouse should consider filing a claim asserting an interest in marital property in the bankruptcy case to protect an interest in bankruptcy estate property.
14. Divorce lawyers should include hold harmless provisions and preserve a party’s right to interest upon default in settlement agreements
15. Since only the obligations that exists at the time of the date of filing the bankruptcy are dischargeable, it is likely more advantageous for your filing client to wait to file until after the divorce, especially since in Chapter 13 cases, the obligations to hold the other spouse harmless from credit cards ordered in divorce could be discharged.

Question 68

Are attorney fees related to divorce considered a non support obligation ?

Answer 68

As for attorney’s fees related to the divorce, Chapter 13 requires the attorney’s fees obligation to be part of the DSO.