The Interplay Between Bankruptcy and Divorce Law in Virginia

How should an income tax refund from a joint tax return be divided between a husband and wife in a Virginia bankruptcy case?

In the case of In re: Lyall, 191 B.R. 78 (E.D. Va., 1996), the U.S. District Court for the Eastern District of Virginia ruled that the tax refund had to be divided in proportion to each spouse’s withholding rather than divided equally or divided in proportion to each spouse’s percentage of the total income.  http://scholar.google.com/scholar_case?case=12729701313817348780&q=In+re:+Lyall&hl=en&as_sdt=80000000000003 .  The husband had filed a chapter 7 bankruptcy case in the Eastern District of Virginia Bankruptcy Court without his wife.  In the bankruptcy case, the Debtor husband listed on his Schedule B, as part of the property of the estate under Section 541 of Title 11, the Bankruptcy Code, http://www.law.cornell.edu/uscode/html/uscode11/usc_sec_11_00000541—-000-.html , a tax refund, which the husband claimed as exempt on Schedule C under the Virginia Homestead Exemption found in Section 34-4 of the Code of Virginia, http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+34-4 .   A creditor objected the husband’s claimed exemption of the tax refund.  Although most of the couple’s income had been derived from the husband’s withholdings, the bankruptcy court judge ruled that the husband and wife were each entitled to 50% of the tax refund, based on the case of Bass v. Hall, 79 B.R. 653 (Bankr., W.D. Va., 1987) http://scholar.google.com/scholar_case?case=8582857943146304269&q=In+re:+Lyall&hl=en&as_sdt=80000000000003 .   

On appeal, the United States District Court for the Eastern District of Virginia disagreed.  The court recognized that there were three positions across the county: a majority position which held that the tax refund should be allocated proportionally according to each spouse withholding in the relevant year, a position that the tax refund should be allocated equally without regard to income or withholding, and a position that the refund should be allocated in proportion to each spouse’s income produced.  The court agreed with the majority position on the grounds that the income withheld would have been the husband’s property if the withholding amount were correct, and the husband could not have transferred that amount of income to the wife before filing because that transfer could be set aside as a fraudulent transfer.  The court recognized the well-established law that the filing of a tax return does not alter the property rights between the spouses, citing In re: Wetteroff, 453 F.2d 554 (8^th Cir, 1972), http://scholar.google.com/scholar_case?case=2785059336103572556&q=In+re:+Lyall&hl=en&as_sdt=80000000000003 .

You should consult with your Virginia bankruptcy lawyer concerning your property rights in a tax refund from a joint tax return with your husband or wife.

Must a wife file a complaint objecting to the dischargeability of a domestic support obligation in husband’s chapter 7 bankruptcy case in Virginia?

No, the spouse does not have to file a complaint objecting to the dischargeability of a domestic support obligation in his or her spouse’s chapter 7 bankruptcy case.  Domestic support obligations are automatically nondischargeable in bankruptcy and both the federal and state courts have jurisdiction over cases involving the dischargeability of a family law debt.  In the greater Richmond metropolitan area, this means this issue of the dischargeability of a particular debt related to a separation or divorce, or support, in bankruptcy may be decided in the Virginia Circuit Courts or Juvenile and Domestic Relations District Court for Chesterfield County, Hanover County, Henrico County or the City of Richmond, or the U.S. Bankruptcy Court for the Eastern District of Virginia, Richmond Division.

Under Section 523 of the Bankruptcy Code, certain debts are not dischargeable in bankruptcy.  http://uscode.house.gov/uscode-cgi/fastweb.exe?getdoc+uscview+t09t12+3806+0++%28%29%20%20AND%20%28%2811%29%20ADJ%20USC%29%3ACITE%20AND%20%28USC%20w%2F10%20%28523%29%29%3ACITE%20%20%20%20%20%20%20%20%20 .  The types of debts that may be automatically nondischargeable include certain types of taxes or customs duties; domestic support obligations; certain fines, penalties or forfeitures owed to the government; most student loans; personal injury or wrongful death caused by operating a vehicle while intoxicated; a debt that was or could have been listed in a prior case in which the debtor waived, or was denied, a discharge; a judgment, order or decree concerning fraud or defalcation as a fiduciary of a federally insured depository or credit union; a malicious or reckless failure to fulfill a commitment to a  Federal depository institutions regulatory agency to maintain capital; criminal restitution under Title 18 of the U.S. Code; a debt incurred to pay a nondischargeable tax to the U.S. or other governmental unit; fines or penalties imposed under Federal election law; certain family law debts that are not Domestic Support Obligations; certain post-petition homeowner or condominium association dues; fees, costs and expense on a prisoner for filing a case, motion, complaint or appeal; debt owed to certain retirement plans; and certain violations of Federal securities law.  Several types of debts are only potentially nondischargeable;  these debts will be discharged unless the creditor files a complaint or adversary proceeding within sixty (60) days following the date first set for the meeting of creditors objecting to the discharge of a debt based on fraud, false pretenses, use of a false financial statement in writing; fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny; or wilfull and malicious injury by the debtor to another entity or the property of another entity.

Domestic support obligations and family law debts that are not domestic support obligations do not require the filing of a complaint within a certain time period for the debts to be nondischargeable.  As answered in the question, “Can My Spouse Discharge a Family Law Debt in Bankruptcy?”, http://bankruptcydivorceblawg.com/?page_id=23 , while domestic support obligations are nondischargeable in all bankruptcies, family law debts that are not domestic support obligations may be discharged in a chapter 13 case, but not in a chapter 7 case.

You should consult with your Virginia bankruptcy or divorce lawyer concerning the dischargeability of family law debts in bankruptcy.

What kind of property can a husband or wife protect in bankruptcy?

Both federal and state laws allow a husband or wife, living together or separated, to protect certain property from creditors.  The protected property may automatically be, or can become, exempt from creditor collection process.  Consequently, these laws are known as exemptions and the property is called exempt property.  As explained below, a divorce can affect the property that can be protected from creditors, in or out of bankruptcy.

Bankruptcy law is concerned with both federal and state law, and the conflict between the two.  The bankruptcy code itself is federal law.  The bankruptcy courts are part of the federal court system, with appeals to the U.S. District Court.  Family law and property law are largely state law.  The bankruptcy code respects this division between federal and state law by allowing each state to provide its citizens with state law exemptions in bankruptcy, or the use of the federal bankruptcy exemptions, or the choice to use either.  Those states that do not allow their citizens to use the federal bankruptcy exemptions, like the Commonwealth of Virginia, are said to have “opted out” of the federal bankruptcy exemptions contained in Section 522(d) of the Bankruptcy Code.  http://uscode.house.gov/uscode-cgi/fastweb.exe?getdoc+uscview+t09t12+3805+0++%28%29%20%20AND%20%28%2811%29%20ADJ%20USC%29%3ACITE%20AND%20%28USC%20w%2F10%20%28522%29%29%3ACITE%20%20%20%20%20%20%20%20%20 .  Section 34-3.1 is the “opt-out” statute which restricts the use of the bankruptcy exemptions in Virginia. http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+34-3.1 .

Prior to enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in October 2005, it was possible for a person contemplating bankruptcy to choose to reside in a state with generous exemptions, especially a state with a generous homestead exemption like Florida or Texas.  The person contemplating bankruptcy could protect assets by buying an expensive home that was protected under state law.

Section 522 attempts to eliminate such forum shopping by introducing a look back period into a person’s right to claim exemptions.  Domicile is a person’s legal home, where he or she permanently resides, while residence is a person’s physical location.  A person’s domicile is where a person intends to reside for the indefinite future.  Under Section 522(b)(3)(A), the debtor’s domicile for the 730 day period immediately preceding the filing of the bankruptcy determines the state law that applies to the debtor’s case.  If the debtor has more than one domicile during the 730 day period, then the domicile which occupied the greater portion of the 180 day period prior to the 730 period will determine which state’s laws are applicable.

A husband or wife who was domiciled in Virginia during the relevant period can use various Virginia state law exemptions and certain non-bankruptcy federal exemptions, the tenancy by the entirety with the common-law right of survivorship to protect real estate, and federal bankruptcy exemptions protecting certain retirement funds, including 401(k)s and IRAs within limits.  Most of the Virginia state law exemptions are contained in Title 34 of the Code of Virginia, including the homestead exemption in Section 34-4  http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+34-4 and the poor debtor’s exemptions in Section 34-26 http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+34-26   A handy reference guide to the federal and Virginia exemptions is found in the official court form “Request for Hearing – Notice of Exemption Claimed” made available to judgment debtors subject to creditor process in Virginia, on the Virginia court’s website at http://www.courts.state.va.us/forms/district/dc407.pdf , which lists the following exemptions:  Social Security benefits and Supplemental Security Income at 42 U.S.C. Section 407 http://www.law.cornell.edu/uscode/html/uscode42/usc_sec_42_00000407—-000-.html ; Veteran’s benefits at 38 U.S.C. Section 5301 http://www.law.cornell.edu/uscode/html/uscode38/usc_sec_38_00005301—-000-.html ;  Federal Civil Service retirement benefits at 5 U.S.C. Section 8346  http://www.law.cornell.edu/uscode/html/uscode05/usc_sec_05_00008346—-000-.html ; Annuities to survivors of federal judges at 28 U.S.C. 376(n) http://www.law.cornell.edu/uscode/html/uscode28/usc_sec_28_00000376—-000-.html ; Longshoreman and Harborworkers Compensation Act at 33 U.S.C. Section 916 http://www.law.cornell.edu/uscode/html/uscode33/usc_sec_33_00000916—-000-.html ; Black lung benefits at 30 U.S.C. Sections 931 http://www.law.cornell.edu/uscode/html/uscode30/usc_sec_30_00000931—-000-.html  and 932 http://www.law.cornell.edu/uscode/html/uscode30/usc_sec_30_00000932—-000-.html ; Seaman, master, or fisherman’s wages, except for child or spousal support and maintenance at 46 U.S.C.A. Section 11109 http://www.law.cornell.edu/uscode/html/uscode46/usc_sec_46_00011109—-000-.html ; Unemployment compensation benefits at Section 60.2-600 of the Code of Virginia http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+60.2-600 ; portion of wages not subject to garnishment in Section 34-29 of the Virginia Code http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+34-29 ; public assistance payments in Section 63.2-506 of the Code of Virginia http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+63.2-506 ; the homestead exemption and the additional exemptions for dependents, older residents and disabled veterans at Section 34-4.1 of the Code of Virginia http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+34-4.1 ;  the poor debtor’s exemptions and agricultural exemptions in Section 34-27 of the Virginia Code http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+34-27 ; worker’s compensation in Section 65.2-531 of the Code of Virginia  http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+65.2-531 ;  growing crops in Section 8.01-489 of the Code of Virginia http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+8.01-489 ; benefits from group life insurance policies in Section 38.2-3339 of the Virginia Code  http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+38.2-3339 ; proceeds from industrial sick benefits insurance in Section 38.2-3549 http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+38.2-3549 ; assignments of certain salary and wages in Section 55-165 of the Code of Virginia http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+55-165 ; pre-need funeral contracts at Section 54.1-2823 of the Virginia Code http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+54.1-2823 ; benefits for victims of crime at Section 19.2-368.12 of the Code of Virginia http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+19.2-368.12 ;  and certain retirement benefits at Section 34-34  http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+34-34 ;

In a family law case, you should check with a Virginia bankruptcy or family law lawyer to determine if these exemptions apply to support or alimony protected under federal law at 42 U.S.C. Section 659 http://www.law.cornell.edu/uscode/html/uscode42/usc_sec_42_00000659—-000-.html

As discussed in answer to the question, “Is my real estate vulnerable to creditors when I divorce?”, http://bankruptcydivorceblawg.com/?page_id=43 a divorce terminates the survivorship in the tenancy by the entirety, exposing real property to the claims of either spouse.

You should consult with your Virginia bankruptcy attorney to determine what property will be protected if you should file bankruptcy in Virginia.

Can payments on an expensive home and BMWs be used to determine the disposable income of an above-median debtor in chapter 13 bankruptcy?

Yes, in the case of George Pryor Faison, II, 416 B.R. 227 (Bkr. E.D.Va., 2008), in the Eastern District of Virginia, Richmond Division,  http://scholar.google.com/scholar_case?case=16150682234054747999&q=In+re:+George+Faison&hl=en&as_sdt=80000000000002 , the bankruptcy judge held that the disposable income of an above-median-income debtor can be determined using the monthly income resulting from Official Form B22C, the means testing form, minus the expenses allowed by 11 U.S.C. 707(b)(2)(A)(iii) http://uscode.house.gov/uscode-cgi/fastweb.exe?getdoc+uscview+t09t12+3843+0++%28%29%20%20AND%20%28%2811%29%20ADJ%20USC%29%3ACITE%20AND%20%28USC%20w%2F10%20%28707%29%29%3ACITE%20%20%20%20%20%20%20%20%20 , including payments on a luxury goods, like BMWs, and an expensive, $700K home, even if such payments were at the expense of the unsecured creditors, who were only receiving a 3% dividend.  Bankruptcy attorney James H. Wilson, Jr., successfully defended against the unsecured creditor’s objections to confirmation of the chapter 13 plan based on failure to meet the liquidation test and the good faith test.  Although the bankruptcy judge sustained the objection to confirmation based on underfunding, this objection could be overcome by increasing the funding, which was done in a modified plan.

 Although this case does not directly concern a divorce, the same issue may be applicable to separated or divorcing spouses.

May accrued rent of the former marital residence kept by husband be treated as waste of a joint asset in equitable distribution proceedings in Virginia?

In the Virginia Circuit Court case of Penza v. Penza, Case No: CL07-92, in the Circuit Court of Rappahannock County, the divorce court judge held that the accrued rent that was kept by the husband, who was not occupying the property and did not intend to retain it, was waste of a joint asset.

The parties were married for approximately seventeen years.  The husband was the primary breadwinner, earning a substantial income, while wife was a stay at home mom.  Most of the evidence was received by the judge from wife’s divorce lawyer, as husband had represented himself and not well.   The Virginia judge recognized the wife’s attorney for providing the documentation and organizing the material effectively to support a decision. The most valuable asset of the parties was the former marital residence, a single family house valued at $525,000 at the time of the equitable distribution hearing in the divorce case, with a mortgage of $267,000, leaving marital equity of $258,000.  After the parties separated, husband left the marital residence and rented it out to tenants.  The husband collected rent from the property, but did not pay the mortgage, as ordered by the divorce court judge at the pendente lite hearing.  Neither party listed the accrued rent on their schedules of assets.  At the conclusion of the Virginia divorce case, the judge took the matters of equitable distribution, spousal support, child support, and attorney’s fees under advisement, meaning the judge took the matters under consideration, without giving an immediate decision.

In his written opinion, the judge directed that the former marital residence be sold with the equity divided equally between the husband and wife.  If the parties could not agree on a real estate broker, the court appointed a special commissioner of sale to list the property with a broker.  The judge provided that any sales contract would have to be approved by the court.  If the property did not sell within six months, then it would be sold at auction.  The husband was ordered to pay half of the accrued rent in the amount of $10,500 to wife.  All future rents were to be paid to the wife, to be received by her until half the accrued rent was repaid.  Upon full repayment, the wife would then send half the rent each month to husband.

With regard to the personal property, the court ordered that the husband and wife conduct an auction between themselves of all the personal property.  The court would determine the net difference between the sums bid, and divide those equally between the parties, with the parties receiving the items of property after the bidded sums were paid.

With regard to spousal and child support, the Virginia divorce court found that the husband’s monthly income was $18,500, of which he was ordered to pay $4,600 per month to wife as spousal support for seven years, to be reduced by 50% absent a material change in circumstances.  The husband was not required to provide health insurance to wife upon entry of the divorce decree.  The husband was ordered to pay $2,062 a month in child support to wife, with a credit for required health insurance coverage for the two children.

Finally, the husband was ordered to pay $20,500 of wife’s attorney’s fees, within six months.  The divorce court judge recognized that wife’s attorney provided much of the documentation in the case and organized the presentation of the case in an effective manner.

You should consult with your Virginia divorce lawyer regarding the treatment of rent from the marital residence in equitable distribution.

Can a divorced lawyer husband reduce spousal support in Virginia to his ex-wife upon his self-employment?

In the unpublished case of Amberly v. Amberly, Record No. 1783-09-4, (Va. App., February 2, 2010, the Virginia Court of Appeals upheld the trial court judge denial of the attorney husband’s motion to modify support and award to wife of her attorney’s fees. http://www.courts.state.va.us/opinions/opncavwp/1783094.pdf .

Husband was an attorney working in trademark and patent litigation, making approximately $100,000 a year.  When the husband and wife divorced in Virginia, the divorce court judge ordered husband to pay $2,200 a month in spousal support to wife for fifteen years.  Husband was concerned about losing his job and starting looking for employment.  When husband could not find a job, he started his own firm as a self-employed attorney-at-law.  The lawyer husband filed a motion in the Virginia Circuit Court to modify his spousal support obligation due to his self-employment.  During the three and a half months prior to the hearing on modifying support, husband earned approximately $1,300 a month from his self-employment as a lawyer and paid no support to his wife.  The divorce court denied the husband’s motion to modify spousal support and ordered husband to pay $10,000 in attorney’s fees to wife for defending the motion.  The husband appealed.

The Virginia Court of Appeals reviewed the law applicable to the case.  Under Section 20-109 of the Code of Virginia, a party may modify the amount or duration of an order for spousal support or maintenance as the circumstances may make proper.  http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+20-109 .  The party asking for a modification of support must prove a material change in circumstances and that this change warrants a modification in support.  The material change must bear upon the financial needs of the dependent spouse or the ability of the supporting spouse to pay.  Street v. Street,  25 Va. App. 380, 488 S.E.2d 665 (1997)  http://www.courts.state.va.us/opinions/opncavwp/2363954.pdf .  The trial court has the discretion to determine whether a spouse is entitled to a modification of support, and that determination will not be overturned unless it is clearly unjust.

In this case, the lawyer husband introduced only his own testimony that he was involuntarily unemployed, with little documentary support or other witnesses.  In addition, the attorney husband had failed to pay his court ordered support even before he lost his job.  The trial court judge had noted that the husband made his motion to modify support only a year after the final hearing in the divorce case.  On top of that, the judge doubted the credibility and completeness of the husband’s presentation concerning his reduction in income.  Consequently, the trial court judge found that the reduction in husband’s income was his own fault, and not a material change in circumstances since the last support order.

The Virginia Court of Appeals found no error in the trial court judge’s fact findings or application of the law.  Although there was some evidence that wife’s income had increased, the court restated the rule that not every material change in circumstances justifies a modification of support, citing Blackburn v. Michael, 30 Va. App. 95, 515 S.E.2d 780 (1999). http://www.courts.state.va.us/opinions/opncavwp/0259983.pdf .  Further, the Virginia Court of Appeals did not find an abuse of discretion in the trial court’s award of $10,000 in attorney’s fees to wife, as she incurred more than three times that amount in defending the motion while husband represented himself pro se and husband had offered little documentary evidence of his financial condition.

You should consult with your Virginia divorce lawyer concerning whether spousal support may be modified in your circumstances.