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Filing for Bankruptcy with A Side of Divorce Proceeding
Filing for divorce is never an easy process. This can become more complicated when one of the spouses seeks to file for bankruptcy in the middle of a pending divorce proceeding. This blog will explore the factors that individuals need to consider if they’re looking to file for bankruptcy while their divorce proceeding is pending.
Once a person files for bankruptcy (referred to as a “debtor”), the automatic stay under § 362(a) of the Bankruptcy Code is invoked. As a result, the debtor’s estate (all real and personal property belonging to the debtor prior to the bankruptcy) is protected and preserved for all creditors. The stay protects both the debtor from creditors seizing the debtor’s assets, and protects the creditors’ interest in the debtor’s assets against other creditors.
In relation to a divorce action, pursuant to 11 U.S.C. § 362(a), the actions that are “stayed” include:
- the commencement or continuation of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy] case;
- the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the [bankruptcy] case; and
- any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.
Exceptions to § 362 in Relation to Divorce Proceedings
It is important to note that there are certain aspects of a divorce proceeding that may continue despite the filing of a bankruptcy by one of the spouses.
In accordance with 11 U.S.C. § 362(b), a divorce proceeding may continue:
- to establish paternity;
- for the establishment or modification of an order for domestic support obligations;
- matters concerning child custody or visitation; and
- for the dissolution of marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the bankruptcy estate.
Vacating the Automatic Stay to Enforce Orders Obtained in a Divorce Proceedings
While the divorce proceeding remains pending, the Family Court can grant several orders concerning i) the division of property; ii) child support and alimony payments; iii) custody and visitation rights; iv) division of liabilities and other miscellaneous orders concerning the dissolution of the marriage. For the most part, these orders are interim orders that become part of the Final Judgment of Divorce once one is entered. They are referred to as interim orders because it is not considered a final order and they can be reversed after reconsideration of the Court. However, a Final Judgement of Divorce is almost impossible to reverse.
Enforcement of Interim Orders Against the Debtor When there is No Final Judgment of Divorce
As explained above, and regardless of whether a Final Judgment of Divorce (“FJoD”) has been entered in the divorce proceeding, a non-filing ex-spouse can enforce an interim order against the debtor without authority of the bankruptcy court as long as the interim order involves i) paternity issues; ii) custody or visitation rights; iii) the establishment or modification of child support or alimony; and iv) the dissolution of the marriage (as long as the order does not divide any property belonging to the bankruptcy estate). This last point is an important one.
What if the non-filing ex-spouse obtains an interim order that directly affects property of the bankruptcy estate, does not fall within any of the exceptions enumerated above, and is now seeking to enforce the same in Bankruptcy Court?
Interest of the Non-Filing Ex-Spouse in Property Belonging to the Bankruptcy Estate
In accordance with § 541 of the Bankruptcy Code, the filing of a bankruptcy petition creates an estate that consists of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. §541(a)(1).
Many Bankruptcy Courts across the country have determined that “a determination of whether an ex-spouse’s interest in the debtor’s property is separate property, and thus not included in the debtor’s bankruptcy estate, is decided by reference to State law.” In re Brown, 168 B.R. 331, 334-35 (Bankr. N.D. Ill. 1994).
Under New Jersey law, “ownership vests in the spouse to whom property has been distributed upon entry of a judgment of divorce.” In re St. Clair, 08-27884 MBK, 2011 WL 6888369, at *3 (Bankr. D.N.J. Dec. 29, 2011) (the Court finding that the entry of final judgment of divorce is the delineating factor that separates an ex-spouse’s property and property of the bankruptcy estate).
To summarize it plainly, if there is no FJoD, any interest held by the non-filing ex-spouse in property belonging to the bankruptcy estate, becomes part of the bankruptcy estate, and subject to the Bankruptcy Court’s protection. Therefore, if the non-filing ex-spouse has an interim order granting him or her authority over certain property that belongs to the bankruptcy estate, it may not be enforced unless there is a FJoD.
This, however, is not as clear or certain as it may seem.
A Bankruptcy Court May Still Enforce an Interim Order if it is in the Best Interest of the Bankruptcy Estate
In my recent experience, I dealt with a case much similar to facts explained above. A non-filing ex-spouse and the debtor were in the middle of a divorce proceeding, and the ex-spouse was attempting to enforce an interim order granted by the Family Court. This interim order gave the ex-spouse authority to sell property that was also property belonging to the bankruptcy estate.
Although case law was on our side in this particular case, the Bankruptcy Court determined that based on the debtor’s low probability of presenting a successful bankruptcy, and the fact that there was a buyer willing and able to pay fair market value for the property in question, it would be in the best interest of the creditors (including the ex-spouse) and the bankruptcy estate to allow the non-filing ex-spouse to sell property. Now, this decision was against my client’s interest, but looking at it subjectively, it was a fair decision for all parties involved in the debtor’s bankruptcy case.
The facts of your case may not be similar or may be completely different than the facts of the case outlined above. However, the important take away is that, regardless of how clear the law may be on a particular issue, there are other factors that need to be considered when it comes to a bankruptcy with a side of a divorce proceeding. Your best bet is to speak with a bankruptcy attorney to discuss your real options.
If you’re in the middle of a divorce proceeding and looking to file bankruptcy or your ex-spouse is filing bankruptcy and you need to know how to protect yourself, your best bet is to contact one of our bankruptcy attorneys to see how we can help. Call one of our bankruptcy attorneys for a free consultation and learn about your options are during this difficult time.
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