The Interplay Between Bankruptcy and Divorce Law in Virginia

Can a Virginia divorce court determine the dischargeability of debt in bankruptcy in a contempt proceeding?

Normally, the U.S. Bankruptcy Court is the appropriate forum for determining the dischargeability of debts.  Although the U.S. Bankruptcy Court has the jurisdiction, or power, to determine whether a particular debt is dischargeable in a related process known as an adversary proceeding, it shares that jurisdiction for divorce-related debts with the Virginia Circuit Courts.  The bankruptcy court only has exclusive jurisdiction or power to determine the dischargeability of debts based on false pretenses, fraud, use of a false financial statement, larceny, embezzlement, and willful and malicious injury to another person or the property of another person; a creditor must file a complaint within 60 days in the bankruptcy court to determine the dischargeability of these debts, or they are discharged.

The tension between the jurisdiction of the Virginia divorce courts and federal bankruptcy courts is illustrated by the case of In re Crawford, 183 B.R. 103 (Bankr. W.D. Va., 1995).  In Crawford, husband and wife had entered into a post-nuptial agreement, more commonly known as a separation agreement or property settlement agreement, which was incorporated into a final decree of divorce in a Virginia Circuit Court.  In the separation agreement, the husband agreed to hold wife harmless for her part of a joint debt to a credit union.  The husband did not pay the debt and the credit union pursued wife for payment.  The husband filed a chapter 7 bankruptcy case and received a discharge of his debts.  The wife filed a motion in the Virginia divorce court to show cause why husband should not be held in contempt of court for violating the decree of divorce incorporating the post-nuptial agreement.  The Virginia Circuit Court judge found the husband in violation of the divorce decree, sentenced him to an indefinite term in prison, suspended the sentence for 60 days, and allowed him to purge himself of contempt by complying with the separation agreement.  The husband filed a motion in the bankruptcy court to stay the divorce court’s ruling and find wife in violation of the discharge injunction.

The bankruptcy court judge held that the dischargeability of a divorce-related debt is not finalized until the husband or wife litigates the issue in the Virginia Circuit Court or the U.S. Bankruptcy Court.  Consequently, the judge found that the wife’s show cause motion could not be a violation of the discharge injunction.  The husband could defend the wife’s motion in divorce court or seek removal of the proceeding to federal court within 30 days of his receipt of the initial pleading.  In this case, the husband chose to defend the motion in the Virginia Circuit Court and the divorce court judge found that the hold harmless agreement by husband to wife was the real debt in issue.  By defending the motion in the divorce court, the husband had allowed the state court judge to decide the dischargeability of the hold harmless agreement and he could not then re-litigate the issue in the bankruptcy court.

You should consult with your bankruptcy or divorce lawyer to determine whether you should remove a divorce contempt proceeding to federal court.

Are divorce court contempt proceedings always a violation of the bankruptcy automatic stay?

It depends on the type and timing of the contempt proceedings.  In the case of In re Dill, 300 B.R. 658 (Bankr. E.D. Va., 2003), a husband and wife had entered into a property settlement agreement in which the spouses agreed not to incur further obligations on any joint accounts.  The separation agreement was incorporated into the final decree of divorce in the Virginia Circuit Court.  The husband incurred additional charges after the final decree of divorce was entered, then filed a chapter 7 bankruptcy listing wife as one of his creditors.  The wife filed a motion to show cause why the husband should not be held in contempt of court by the divorce court judge.  The Virginia Circuit Court divorce judge found the husband had violated the divorce order and held him in civil contempt of court.  The divorce court judge threatened to jail the husband unless he paid wife for the charges he incurred on the credit card and her attorney’s fees. The husband filed a motion for sanctions against wife and her attorney in the bankruptcy court for violating the automatic stay and/or the bankruptcy discharge injunction.  The wife defended the motion by claiming that she was not a creditor, that the obligation arose after the bankruptcy was commenced (not a pre-petition debt) when the husband was found in contempt, and that she was not collecting a debt, but merely seeking a remedy for the breach of the property settlement agreement.

The bankruptcy court judge held that the wife was a creditor because she had a claim as defined in the bankruptcy code: a cause of action or right to sue the husband for breaching the property settlement agreement.  The judge further held that the automatic stay protects a debtor from the commencement or continuation of an action to collect a prepetition debt and that the wife had commenced a judicial proceeding prior to the bankruptcy case, even though husband was not held in contempt until after the filing.  The judge also held that there is no real legal distinction between seeking a remedy from a breach of contract and collecting on a pre-petition debt.

In an extraordinary part of the opinion, the court went on the repackage the wife’s defense into the real issues in the case as the judge saw it (even though the wife had not raised them): the nature of the debt and the relationship between state court contempt proceedings and the automatic stay.  The judge found that the breach of the property settlement agreement was not in the nature of support so it was not the type of debt that could be collected during the bankruptcy, because the support obligation in the agreement was made without regard to the amount that the debtor later wrongfully charged on the joint account.  The court distinguished between two types of contempt proceedings: a punitive contempt order that upholds the dignity of the court, or criminal contempt; and a coercive contempt order that vindicates the private rights of private litigants, or civil contempt.  In this case, the judge found that the contempt proceeding involved a civil contempt order between private litigants to vindicate a private right, of which the debtor husband could purge himself by paying his wife back for his wrongful charges.  As such, the wife’s commencement, continuation and prosecution of these contempt proceedings during the bankruptcy case was a violation of the automatic stay.

You should consult with your bankruptcy or divorce lawyer regarding the continuation of your divorce proceedings during a bankruptcy proceeding by your spouse.

Can a wife obtain more than half of the value of the marital residence in a Virginia divorce?

In an unpublished opinion, the Virginia Court of Appeals Tye v. Tye, No. 0833-08-1 (August 11, 2009) upheld an award of 65% of the net proceeds from the sale of the marital residence to the wife. http://www.courts.state.va.us/opinions/opncavwp/0833081.pdf

 The husband and wife were married and lived together for twelve years.  The wife left the husband due to the husband’s mental health problems and his failure to take all his prescribed medications.  The husband filed for divorce based on wife’s desertion.  The wife filed a cross-bill for divorce based on constructive desertion and mental cruelty.  At the pendente lite hearing, the divorce court awarded joint legal custody of the children to husband and wife, with primary physical custody to wife.  The husband was allowed to stay in the marital residence provided he reimbursed wife for the mortgage payments and the additional costs of maintaining him on her health insurance.

 The husband subsequently failed to obey the court’s orders and did not cooperate with his attorneys.  At the divorce trial, the court refused to allow into evidence an alleged agreement submitted by the wife and objected to by the husband as an invalid contract.  The court awarded possession of the marital residence to wife and ordered that the property be sold with the net proceeds split 65% to wife, 35% to husband.  After the trial, the husband refused to leave the marital residence.  The court found him in contempt of court and jailed him.  While husband was in jail, wife took possession of the marital residence.

 In Virginia, when the husband and wife cannot agree on how to divide their marital property, a divorce court can decide how it should be divided under Virginia’s equitable distribution statute:  http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+20-107.3  In the Tye case, the Virginia Court of Appeals restated the general rules that Virginia law does not establish a presumption of equal distribution of marital assets and that equitable distribution lies within the sound discretion of the trial judge.  This means that a Virginia divorce court does not have to order a 50/50 split of marital property, but can divide the property fairly based on a number of factors.  In this case, the husband failed to cooperate with the wife in selling the property and also failed to properly maintain the property, which caused it to depreciate in value.  The Court of Appeals concluded that the divorce court had not abused its discretion in awarding wife 65% of the net proceeds from the sale of the marital residence.

 You should consult with your Virginia divorce lawyer concerning the equitable division of your marital debts and property.

TOP TEN COSTLY DIVORCE MISTAKES TO AVOID DURING A RECESSION

1.  Adultery may eliminate spousal support in Virginia.

2.  Be aware of formulas and guidelines for determining support in Virginia:  child support guidelines are the presumptively correct starting point for support; pendente lite spousal support: w/child – 28/58%, w/o child – 30/50%.

3.  Alimony: request it, reserve it, or lose it.

4.  You have 2 years to file for an annulment and you may lose your right by cohabitation after knowledge of the facts.

5.  Do not delay the filing of a motion to modify support upon a material change in circumstances.

6.  Judges are hostile to the concept of separating under the same roof in Virginia.

7.  A suit for a divorce from bed and board can be filed immediately in the Circuit Court. You may be able to obtain pendente lite relief for temporary support, attorney’s fees and costs, protective orders, temporary custody and child support, exclusive use of the marital residence, or a freeze on assets.

8.  Consult with your tax advisor concerning the tax consequences of spousal support, allocation of the dependency exemption, exclusion of gain from sale of marital residence, etc.

9.  Be careful about leaving the marital residence without a separation agreement.

10.  Consider the possibility in your agreement that one spouse may file for bankruptcy relief.

You should consult with your Virginia bankruptcy or divorce lawyer to avoid making a costly mistake in your separation or divorce.

Can a husband always terminate spousal support upon retirement?

In the Virginia Court of Appeals case of  Brown v. Brown, 53 Va. App. 723, 674 S.E.2d 597 (2009),  a former husband filed a petition to terminate spousal support due to a material change in circumstances, his retirement.  In the final decree of divorce entered in the Virginia Circuit Court some five years earlier, the husband had been ordered to pay a set amount of spousal support each month indefinitely.   The husband and wife had not entered into a separation agreement or property settlement agreement prior to the divorce.

After the divorce, the wife filed a show cause petition in the Virginia Juvenile and Domestic Relations District Court to force husband to pay an arrearage in the court-ordered spousal support payments.  The parties settled the show cause proceeding with a consent order.

Approximately three years later, the husband retired and filed a motion in the Virginia Juvenile and Domestic Relations District Court to terminate spousal support due to a material change in circumstances.  The wife filed a motion to dismiss, which was granted by the judge, and the husband appealed to the Virginia Circuit Court.  The Circuit Court affirmed the lower court’s decision and found that the order was a consent decree that could not be modified or terminated at the request of just one of the parties and that the order was a stipulation or contract under Section 20-109(C) of the Code of Virginia which did not itself provide for modification or termination.  http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+20-109 .

The Virginia Court of Appeals recognized that general rule that a court can modify or terminate a spousal support order by proving both a material change in circumstances and that this change warrants a modification of support.  Under Section 20-109(C), the court’s right to modify or terminate support may be limited by a contract between the parties, such as a separation agreement or property settlement agreement, incorporated into a decree or court order in a case for divorce, annulment or separate maintenance in the Circuit Court, or in a case for child support or spousal support under Section 16.1-241(A)(3) or (L) in the Juvenile and Domestic Relations District Court. http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+16.1-241 .  The Virginia Court of Appeals recognized that a consent decree may constitute a stipulation or contract, but does not necessarily constitute a contract in every case.  In this case, the wife did not meet her burden of proving a contract because the consent order arose out of a show cause proceeding, not a proceeding to modify spousal support.  The consent order did not concern the amount of spousal support, but the manner in which husband would pay the arrearage in spousal support.  In addition the consent order did not purport to settle all matters between the parties.  Since the consent order did not modify or supplant the support provision in the final decree of divorce, the support provision in the final decree of divorce could still by modified by the court.  In dicta, the court noted that if the parties had truly intended to modify the final decree of divorce, the parties could have asked the Circuit Court to incorporate the consent order.

You should consult with your bankruptcy or divorce lawyer to discuss whether your support obligations may be modified upon your retirement.

What are the different effects of a liquidation or a plan bankruptcy on a Virginia separation and divorce?

There are two different types of bankruptcies, a liquidation and a plan bankruptcy.   Each will have different effects on your divorce proceeding.  A liquidation, represented by Chapter 7 of the Bankruptcy Code, means that the filing husband or wife has agreed to give up his or her non-exempt property to be liquidated by a trustee.  Certain property can be protected from creditors by the husband or wife, or both, under federal and state laws.  The protected property is exempt from creditor process and would also be protected from liquidation by the trustee.  The Chapter 7 trustee has the power and obligation to administer or sell the non-exempt property and pay the creditors from the proceeds of sale.  A trustee can sell jointly owned property and pay the co-owner for his or her interest in the jointly owned property.  As answered in the question, “Is my Virginia real estate vulnerable to creditors when I divorce?” http://bankruptcydivorceblawg.com/?page_id=43 , property held by the spouses in a tenancy by the entirety will be exempt while the husband and wife are married provided there are no joint creditors.

The Chapter 7 liquidation will usually last only about four months and the case filing will not delay the granting of a divorce or the determination or collection of support obligations.  While the equitable distribution portion of the divorce must wait until after the discharge is granted or the case is closed, a spouse could seek relief from the automatic stay to proceed sooner than the time it takes to administer the bankruptcy estate.  Domestic support obligations and debts related to separation and divorce will not be discharged in the Chapter 7 case.

A plan bankruptcy means that the filing husband or wife has agreed to repay part or all of his or her debt through a plan confirmed by the U.S. Bankruptcy Court judge.  Chapter 13 is the most frequently filed type of plan bankruptcy.  Chapter 11 is a reorganization for businesses or individuals, and Chapter 12 is a plan bankruptcy tailored for family farmers or family fisherman.  In Chapter 13 bankruptcy, a husband or wife will repay debts over a three to five year period.  The spouse filing bankruptcy can keep his or her property, exempt or not, but must pay the creditors at least as much as they would receive if the husband or wife filed Chapter 7 bankruptcy.  This requirement is known as the liquidation test or the best interests of the creditors test:  the creditors will not be any worse off because the debtor chose to file a plan bankruptcy instead of a liquidation.

A Chapter 13 case has the potential to have a much greater effect on a Virginia divorce than a Chapter 7 case.  The Chapter 13 case may last up to five years and a spouse may want to seek relief from the automatic stay to continue the equitable distribution portion of the Virginia divorce.  Actions taken in violation of the automatic stay will be void.  Domestic support obligations are priority claims that must be paid in full in the Chapter 13 plan.  In addition, in order to have a plan confirmed, the debtor must certify that all domestic support obligations coming due after the case was filed are current.  Similarly, at the conclusion of the Chapter 13 plan, the debtor must certify that domestic support obligations have been satisfied in order to obtain a Chapter 13 discharge.  The Chapter 13 discharge is broader than the Chapter 7 discharge, and can discharge debts to the non-filing husband or wife related to separation and divorce that are not domestic support obligations.

You should consult with your Virginia bankruptcy or divorce lawyer to discuss the different impact of a liquidation or plan bankruptcy on your separation or divorce.

Would a Virginia divorce court order a couple to allow the former marital residence to go to foreclosure?

A Loudoun County Circuit Court judge would not allow such an order.  In the case of Reidy v. Reidy, Civil Action No: 51821, a Virginia divorce court judge was confronted with evidence that the former marital residence had declined in value to a point that the two mortgages against the property exceeded its market value.  Neither husband nor wife was able to afford the payments on the marital real property. 

Under Virginia’s equitable distribution statute, http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+20-107.3, a Circuit Court judge can allocate assets, allocate debts, and make a monetary award in favor of the husband or wife.  In this case, the judge recognized that he could not order a public or private sale of the former marital residence because the husband and wife would not be able to pay the amounts necessary at settlement to pay off the liens against the property.  The divorce court could not order a short sale because the court had no control over the mortgage company.  The divorce judge refused to order the husband and wife to allow the property to go into foreclosure because there was no authority for such an order under the Virginia equitable distribution statute and because it would be “completely abhorrent to the whole equitable distribution scheme for a court to order a party not to pay a debt.”  The court essentially left the parties where they were, declining to allocate assets or debts or to make a monetary award in favor of husband or wife.

You should consult with your bankruptcy or divorce lawyer to discuss your options with respect to a mortgage default or foreclosure sale when you are separated or divorced.

What happens to marital property in a Virginia bankruptcy?

A husband or wife’s interest in assets or property may be viewed differently for purposes of bankruptcy administration and equitable distribution in a divorce case.  When a bankruptcy case is filed, an estate is created.  The bankruptcy estate consists of each and every interest or right that that debtor may have in any kind of property, including tangible property like vehicles, real estate and furniture, and intangible property like a bank account, the right to a retirement or investment account, and an interest in a lawsuit.  A person considering bankruptcy should particularly think about his or her intangible rights, for instance the right to a tax refund, a debt owed by another person, or the right to sue somebody, also known as a cause in action.

For the most part, the property of the estate includes property rights or interests that exist at the time the case is filed, and does not include earnings from services performed by the debtor after the case is filed, except in a chapter 13 case.  In a chapter 13 case, earnings during the case are included in the property of the estate.  In addition, the property of the chapter 13 bankruptcy estate includes property acquired by the debtor after the case is filed until it is closed, dismissed or converted.  In any bankruptcy case, the property of the estate includes property acquired within 180 days by will or inheritance, by a divorce decree, separation agreement or property settlement agreement, and from a life insurance policy.

For the most part, a trustee in bankruptcy steps into the debtor’s shoes with even greater rights than the debtor in the debtor’s property.  The trustee has the greater rights of a super-creditor or a bona fide purchaser and may set aside or avoid certain liens in, or transfers of, the debtor’s property.  For example, a trustee may be able to set aside a transfer of property from a husband to a wife or other relative made before the bankruptcy case was filed.  The trustee can administer or sell jointly owned property respecting the rights of any co-owners.  Thus, a trustee could sell property owned by a husband and wife, if either the husband or wife files bankruptcy, unless the property is owned by the couple as tenants by the entirety and there are no joint unsecured claims against the spouses.  In a debtor in possession case like a chapter 11, chapter 12, or chapter 13 case, the debtor may have some of the same rights as the trustee.

In Virginia’s scheme of equitable distribution, marital property may include property that is titled in the name of the other spouse. Title does not determine whether a husband or wife has an interest in his or her spouse’s property; all property acquired during the marriage before husband and wife separate is presumed to be marital property.   The starting point for equitable distribution in a Virginia divorce is classifying the property of the husband and wife as separate, marital or hybrid – a mixture of separate and marital.  Marital property is all property titled in the name of husband and wife, the marital portion of hybrid property and property acquired by husband or wife that is not separate property.  Separate property is property owned by the husband or wife before marriage, property acquired by will or inheritance or a gift during the marriage, but not from the other spouse, and the separate portion of hybrid property.  If marital property or significant personal efforts of either spouse during the marriage cause a substantial appreciation in the value of separate property, then that property can become hybrid property, with the increase in value being declared by the divorce court as marital property, regardless of the title.

The property of a bankruptcy estate includes both legal and equitable rights, that is, rights that could be enforced in a court of equity, which would include rights in a divorce case.  Thus, the bankruptcy estate of a husband or wife could include that spouse’s rights in marital property under Virginia’s equitable distribution scheme and would certainly include property that the debtor spouse has at the time of filing, or acquires within 180 days after filing, in a divorce or under a separation agreement or property settlement agreement.

You should consult with your Virginia bankruptcy or divorce lawyer to discuss the affect of a bankruptcy proceeding on your marital rights in property.