The Interplay Between Bankruptcy and Divorce Law in Virginia

Must a chapter 13 bankruptcy debtor pay a child support arrearage in full for confirmation of the plan in Virginia?

Not necessarily in the U.S. Bankruptcy Court for the Eastern District of Virginia, Alexandria Division, according to In re: Edwards,  Case No. 09-16765-SSM, (Bankr., E.D. Va, January 20, 2010), http://scholar.google.com/scholar_case?case=4986928117951527381&q=Rosemarie+Edwards&hl=en&as_sdt=80000000000003 , and In re: Sosa, Case No. 09-13389-SSM, (Bankr., E.D. Va, January 21, 2010), http://scholar.google.com/scholar_case?case=489247277853711173&q=Madelyn+Diaz&hl=en&as_sdt=80000000000003 .  The issue in both cases was whether a claim entitled to priority under Section 507 of the Bankruptcy Code must be paid in full under the chapter 13 plan.  http://uscode.house.gov/uscode-cgi/fastweb.exe?getdoc+uscview+t09t12+3798+0++%28%29%20%20AND%20%28%2811%29%20ADJ%20USC%29%3ACITE%20AND%20%28USC%20w%2F10%20%28507%29%29%3ACITE%20%20%20%20%20%20%20%20%20 .

In the Edwards case, the debtors filed for bankruptcy relief under chapter 13 with priority claims of $80,038 in taxes and unpaid child support.  Their budget showed an income withholding order for child support to the California Department of Child Support Services (DCSS).  The debtor husband had two adult children for which he owed child support arrearage and it was not clear whether the unpaid child support would be paid over by DCSS to the mother of the children or retained by DCSS to recoup public assistance paid or welfare paid, such as Aid to Families with Dependent Children (AFDC) or its successor Temporary Assistance to Needy Families (TANF).  In their proposed modified chapter 13 plan, the debtors were to pay priority claims with no payout to the general unsecured creditors.  The plan provided that priority taxes would be paid 100%, but the priority domestic support obligations would be paid less than 100%.  Domestic support obligations, including spousal support or alimony, and child support are priority claims under 11 U.S.C. 507(a)(1), http://www.law.cornell.edu/uscode/html/uscode11/usc_sec_11_00000507—-000-.html , even when the domestic support obligation is owed to a governmental unit, 11 U.S.C. 101(14A), http://www.law.cornell.edu/uscode/html/uscode11/usc_sec_11_00000101—-000-.html , although a domestic support obligation claim of a parent has priority over a domestic support obligation claim of a governmental unit.  The chapter 13 trustee objected to confirmation of the debtors’ proposed modified chapter 13 plan because it did not pay priority claims in full.  The bankruptcy judge recognized that under Section 1322(a)(4), a chapter 13 plan may provide for less than full payment of a certain assigned domestic support obligation claim owed directly to, or recoverable by, a governmental unit, as long as the plan provides that all of the debtor’s projected disposable income will be applied to make plan payments and the chapter 13 plan extends for at least sixty (60) months. http://www.law.cornell.edu/uscode/html/uscode11/usc_sec_11_00001322—-000-.html .  The unpaid balance of the domestic support obligation is not discharged and may be collected from the debtor at the conclusion of the plan.  While the case is pending, the existing income withholding order is not stayed by the automatic stay in bankruptcy.

In the Sosa case, the debtors originally filed a chapter 7 bankruptcy case, then moved the court to convert their case to a chapter 13 case.  A chapter 7 case may be converted to chapter 13 case under Section 706 of the Bankruptcy Code, http://www.law.cornell.edu/uscode/html/uscode11/usc_sec_11_00000706—-000-.html ,provided the conversion is not in bad faith, Marrama v. Citizens Bank of Mass., 549 U.S. 365, 127 S. Ct. 1105, 166 L.Ed. 2d 956 (2007), http://scholar.google.com/scholar_case?case=10387066422425625297&q=Marrama&hl=en&as_sdt=80000000000003  .  In their chapter 13 plan, the Sosa debtors proposed to pay only 26% of the priority domestic support obligation. The debtors’ budget included $500 a month in voluntary child support payments as an expense, leaving only $104 a month for plan payments.  The plan provided nothing for the holders of general, nonpriority, unsecured claims.   The chapter 13 trustee objected to confirmation of the plan as not being proposed in good faith, as required under 11 U.S.C. 1325(a)(3), http://www.law.cornell.edu/uscode/html/uscode11/usc_sec_11_00001325—-000-.html and because the plan did not pay priority creditors in full.   The bankruptcy judge recognized that certain domestic support obligation claims could be subordinated, or paid less than 100% in a chapter 13 plan.  Claims owed to a parent or assigned voluntarily to a governmental unit for the purpose of collection cannot be subordinated.  Again, if the subordinated domestic support obligation claim is to be paid less than 100%, the plan can still be confirmed if all the debtors’ disposable monthly income is paid into the plan for the full sixty (60) months.  The judge held that the objecting party, in this case the chapter 13 trustee, has the initial burden of proving that the domestic support obligation was assigned voluntarily for the purpose of collection, and thus could not be subordinated in the plan.

In the Fourth Circuit, which includes Virginia, the standard for judging good faith is the totality of circumstances. http://scholar.google.com/scholar_case?case=7371348995759148586&q=Deans+v.+O%27Donnell&hl=en&as_sdt=80000000000003 .  In Sosa, the judge was troubled by the debtors’ purpose in converting to chapter 13 when they were current on their mortgages and by the discrepancy between the $500 a month in child support they listed and the $185 claimed by the child support enforcement governmental unit.  As such, the Sosa case was continued for an evidentiary hearing on the issue of good faith.

You should discuss with your Virginia bankruptcy attorney whether your child support arrearage must be paid in full in a chapter 13 plan.

Should a husband or wife consent to relief from the automatic stay if he or she falls behind on the mortgage payments during a chapter 13 case in Virginia?

One of the best reasons for filing a chapter 13 bankruptcy case is to save a home from foreclosure by allowing the homeowner to make the regular post-petition mortgage payments directly to the mortgage lender outside the plan while the arrearage amount is cured in the plan through the plan payments.  Alternatively, a chapter 13 debtor may propose to sell or refinance a home with equity at some point in the plan to cure a default.  The homeowner in chapter 13 receives the protection of the automatic stay in bankruptcy found in Section 362 of the Bankruptcy Code, http://uscode.house.gov/uscode-cgi/fastweb.exe?getdoc+uscview+t09t12+3785+0++%28%29%20%20AND%20%28%2811%29%20ADJ%20USC%29%3ACITE%20AND%20%28USC%20w%2F10%20%28362%29%29%3ACITE%20%20%20%20%20%20%20%20%20 , which prevents the creditors from trying to collect a pre-petition debt from the debtor, the debtor’s property, or the property of the estate.  This stops the mortgage lender from selling the debtor’s home at a foreclosure auction in Virginia.

Despite the best of intentions, statistics tell us that the vast majority of chapter 13 cases are not successfully completed to allow a homeowner to save his or her home. http://www.nber.org/papers/w14179.pdf .  This may happen in one of two ways, because the case is dismissed or because the lender obtains relief from the automatic stay and forecloses on the home.  A case may be jeopardized due to an unanticipated setback while the case is pending such as a job loss or unexpected illness.  In spite of these setbacks, a debtor may still be able to save the bankruptcy case itself by filing an amended or modified chapter 13 plan which makes up for missed plan payments, or by re-filing a second chapter 13 case after dismissal when the debtor is back on his or her feet, provided the lender has not yet foreclosed.  If the debtor is married and the other spouse has not filed bankruptcy, the other spouse may wish to file his or her own chapter 13 case to save the home from foreclosure.

If, on the other hand, the case is continuing, but the debtor fails to make one or more of the regular mortgage payments directly to the lender, the lender will often file a Motion for Relief from the Automatic Stay, asking the bankruptcy judge to allow the lender to pursue the lender’s state law rights and remedies, including a foreclosure sale of the property in Virginia.

The debtor has a number of options when responding to a Motion for Relief from Stay.  A debtor may wish to contest the matter and request an evidentiary hearing on the issue of whether cause exists for relief from stay.  Sometimes the mortgage lender has not properly accounted for the post-petition payments made, or the party filing the motion is not the proper party or does not have standing to enforce the mortgage note in bankruptcy court.   On the other hand, a debtor may decide not to contest the motion or to consent to relief from stay.  If the case is close to dismissal for other grounds, such as default in the plan payments, the debtor may simply allow the case to be dismissed without addressing the motion, relying on the possibility of a good faith re-filing with a motion to extend or impose the automatic stay.  Again, in the case of a married couple where only one spouse has filed bankruptcy, the other spouse may now wish to file a separate chapter 13 case to save their home from foreclosure.

Perhaps the most common, though not always most advantageous, resolution of a Motion for Relief from Stay in U.S. Bankruptcy Court for the Eastern District of Virginia is known as a “drop dead order” or a “six month cure order”.  This order provides that the debtor will make up for the missed payments, plus attorney’s fees and costs, by making extra direct payments for six months to bring the post-petition account current.  This often imposes an impossible burden on a cash-strapped chapter 13 debtor, who is also responsible for making plan payments and the regular mortgage payments at the same time, particularly if all of the debtor’s disposable income is being devoted to plan payments.  If the debtor defaults in the regular payments or extra 6 payments under the drop dead order, then the lender may have to first file an affidavit of default, which, if unanswered, allows the mortgage lender to resort to its state law rights.

Under the holding of Matter of Mendoza, 111 F.3d 1264 (C.A.5 (Tex), 1997), http://scholar.google.com/scholar_case?case=2655781690976855648&q=Matter+of+Mendoza&hl=en&as_sdt=80000000000003  , the debtor has another option.  In certain circumstances, a debtor may be able to put the post-petition arrearage into a modified plan, to be cured along with pre-petition arrearage.  The Mendoza holding rests on the existence of equitable grounds allowing modification in the circumstances and on the particular language of 11 U.S.C. 1322(b)(5) which does not expressly limit the debtor’s right to cure a default to a pre-petition default. http://www.law.cornell.edu/uscode/html/uscode11/usc_sec_11_00001322—-000-.html .

You should consult with your Virginia bankruptcy attorney concerning all of your options when you must respond to a Motion for Relief from Stay in your chapter 13 bankruptcy case.

Is debt incurred during the marriage presumed to be marital debt in Virginia’s equitable distribution scheme?

No, the Supreme Court of Virginia ruled in the case of  Gilliam v. McGrady, Record No. 090958 (April 15, 2010) http://www.courts.state.va.us/opinions/opnscvwp/1090958.pdf , on appeal from the Virginia Court of Appeals.  Husband and wife were married for fifteen years before separating.  The husband lost his job after nine years of marriage and became self-employed.  The husband kept his business affairs secret from his wife.  As the husband failed to pay the employer’s share of required withholding tax, he became personally liable for those taxes, penalties and interest under the trust fund liability imposed by the Internal Revenue Code.  Husband also owed the Internal Revenue Service and the Commonwealth of Virginia for unpaid personal income taxes.  Both husband and wife accused the other of living beyond their means.

In a prior unanimous published opinion concerning the same case, Gilliam v. McGrady, 53 Va. App. 476, 483, 673 S.E.2d 474, 478 (2009), http://www.courts.state.va.us/opinions/opncavwp/0288082.pdf   , the Virginia Court of Appeals had held that wife was not liable for husband’s unpaid withholding taxes under a trust fund liability, discussed herein in answer to the question, “Is a trust fund tax liability from husband’s business a marital debt in Virginia subject to apportionment in equitable distribution?”, http://bankruptcydivorceblawg.com/?page_id=242 .  The case was remanded, or sent back, to the Albemarle County Circuit Court judge to consider the statutory factors in Virginia Code Section 20-107.3, http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+20-107.3 , in order to classify the debt as marital or separate.  On appeal to the Supreme Court of Virginia, the wife assigned error to the Virginia Court of Appeal’s decision on the presumptions and burden of proof applicable to the apportionment between husband and wife of debt incurred during the marriage.  The Supreme Court of Virginia recognized that Section 20-107.3 of the Code of Virginia provides for the classification of property and debts differently. Virginia’s equitable distribution scheme does not provide for any presumption with respect to debts incurred during the marriage, as it does for property acquired during the marriage and before the last separation of the parties, in Virginia Code Section 20-107.3(A)(2).  With respect to marital debt, Virginia Code Section 20-107.3(E)(7) merely provides that the divorce court judge shall consider “…[t]he debts and liabilities of each spouse, the basis for such debts and liabilities, and the property which may serve as security for such debts and liabilities.”  Recognizing the proper separation of powers between the judicial and legislative branches of state government, the Supreme Court of Virginia declined to read into the statute a presumption with regard to marital debts that the Virginia General Assembly did not include.  The  Supreme Court of Virginia ruled that traditional rules of burden of proof and presumption would apply to debts incurred during the marriage.  Proof that debt was jointly incurred creates a prima facie case that the debt is marital debt, and the spouse trying to prove such joint debt is really separate debt of the other spouse would have the burden of persuading the divorce court judge that such debt is separate.   The spouse trying to prove that debt incurred in the name of that spouse alone was really marital debt would have the burden of persuading the trial court that the debt was marital.

You should consult with your Virginia divorce lawyer concerning the burdens of proof with respect to debts incurred during your marriage.

Does a Virginia equitable distribution award to wife based on husband’s adultery, drinking, gambling and verbal abuse require a showing of adverse economic impact?

Not in the case of Attiliis v. Attiliis, http://www.courts.state.va.us/opinions/opncavwp/1087084.pdf  where the Virginia Court of Appeals ruled that husband’s drinking, adultery, gambling and verbal abuse constituted negative nonmonetary contributions to the well-being of the family entitling wife to a Virginia equitable distribution award of $65,000 without a showing of adverse economic impact , citing Watts v. Watts, 40 Va. App. 685, 581 S.E.2d 224 (2003) http://scholar.google.com/scholar_case?case=6895239921102550018&q=Watts+v.+Watts&hl=en&as_sdt=80000000000004 .

In Attiliis, the Virginia Court of Appeals addressed four equitable distribution decisions of the trial court: the distribution of a capital loss carry-forward tax credit; an order to maintain wife as a beneficiary on husband’s life insurance; an award to wife for waste, dissipation of assets, and negative non-monetary contributions; and a finding that husband’s adultery was the primary cause of the dissolution of the marriage.  The Virginia Court of Appeals first restated the rule that it will not reverse the divorce court’s discretion in fashioning an equitable distribution award unless it appears from the record that the divorce court abused its discretion, failed to consider or misapplied the factors in the equitable distribution statute, Virginia Code Section 20-107.3(E),  http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+20-107.3 , or made essential fact findings unsupported by the evidence.

The Virginia Circuit Court in the Attillis case was reversed on its findings with respect to a $75,000 long-term capital loss carry forward and a $40,070 short-term capital loss carry forward as unsupported by the evidence at trial.  Although Wife had listed a $75,000 capital loss shown on tax returns as an asset on a list of assets in evidence, Wife offered just the couple’s 2005 tax return into evidence, which did not reveal the disputed $75,000 capital loss tax credit.  Further, Wife’s attorney did not cross-examine Husband with respect to the exact amount of the capital loss tax credit when he denied the $75,000 figure, and conceded in his closing argument that Wife was claiming half of a $37,070 capital loss carry forward.

The Circuit Court was also reversed on its ruling that husband was required to maintain wife as a beneficiary on his life insurance policy as without statutory support in Virginia Code Section 20-107.3(G)(2).  http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+20-107.3 .  Although Virginia Code Section 20-108.1(D) allows a court to order a party to maintain an existing life insurance policy with a child as the beneficiary in a child support proceeding for the duration of a child support obligation, http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+20-108.1 , and Virginia Code Section 20-111.1 provides that an existing written contract with a revocable death benefit is revoked upon entry of a divorce decree, unless the parties’ contract or the divorce decree provides otherwise, http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+20-111.1 , nothing in the Virginia Code allows a judge to order a spouse to maintain life insurance for the other spouse’s benefit.

With respect to the divorce court’s findings and rulings on waste, dissipation of assets, and negative non-monetary contributions, the Virginia Court of Appeals first reversed the Circuit Court’s equitable distribution award for waste of a bank account following execution of the couple’s separation agreement because the award did not account for husband’s half interest in the wasted funds and thus was unsupported by the evidence.  The court next reversed the divorce court’s award of $50,000 for dissipation of assets as without supporting evidence because waste and dissipation of assets are the same thing and do not occur over the course of the marriage, but instead only while the marriage is undergoing an irreconciliable breakdown.  Finally, the Virginia Court of Appeals upheld the divorce court’s award of $65,000 for husband’s adultery, drinking and verbal abuse because the trial court’s considerations of non-monetary contributions to the well-being of the family do not require a showing of an adverse economic impact, as contended by Husband.

The Virginia Court of Appeals ruled that husband had waived his argument that the circuit court erred in ruling that Husband’s adultery was the primary cause of the dissolution of the marriage because Husband failed to cite legal authority in support of his argument in his appellate opening brief as required by Rule 5A:20 of the Rules of the Supreme Court of Virginia, http://www.courts.state.va.us/courts/scv/rulesofcourt.pdf .

You should consult with your Virginia divorce lawyer concerning the likely effects of spousal misbehavior on an equitable distribution award.

Where can a husband or wife file a divorce case?

A husband or wife can file a divorce case in a court that has jurisdiction in a proper venue.  Jurisdiction has several different meanings and is concerned with the power of the court to decide a matter and bind the parties to the decision.  The Virginia city and county circuit courts have subject matter jurisdiction over divorce cases under Virginia Code Section 20-96:  http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+20-96 .  A person must have a certain connection to the Commonwealth of Virginia in order to file a divorce case here.  At the time of filing, either the husband or wife must have been a bona fide resident and domiciliary of the Commonwealth of Virginia for at least six months preceding the filing, under Section 20-97 of the Code of Virginia.   http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+20-97 .  A member of the armed forces who is stationed in or residing in Virginia and has lived in Virginia for at least six months is presumed to be a domiciliary and resident during that time.  This can include a service member being stationed on or residing in a ship that has a home port in Virginia, or being stationed on or residing on a base in Virginia, even though the federal government has exclusive jurisdiction over the base.  A foreign service officer or serviceperson who is stationed overseas at the time the divorce case is filed and who was domiciled in Virginia for at least six months before being stationed overseas is deemed to be a bona fide resident and domiciliary of Virginia.

There are more complex issues involved when the husband and wife live in different states.  The two primary constitutional issues are the due process of law we are all entitled to and the full faith and credit each state must give to the legitimate acts of sister states.  The marriage itself can be thought of a thing, a res, that follows each of the parties wherever he or she may be domiciled.  Either party may obtain a dissolution of the marriage in a state with jurisdiction over the marriage, known as in rem jurisdiction.  On the other hand, the marriage also creates property rights and duties, including a right to support.  A state may only bind a party to its orders concerning property rights if that state has jurisdiction over that particular person.  This requires more than simply one spouse being a domiciliary of that state.  Under the due process requirements of the U.S. Constitution, a person must have a certain minimum amount of contacts with the state in order for that state to affect that person’s property rights.  When a state exercises jurisdiction over a nonresident, the state is said to be exercising “long-arm jurisdiction”, in effect pulling that out-of-state resident into that state with a long arm to affect that person’s property rights.

Virginia has a long arm jurisdiction statute in Code Section 8.01-328.1 that allows Virginia to exercise jurisdiction over a person in another state when certain connections exist. http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+8.01-328.1 .  Particularly relevant to divorce cases, these connections include owning real estate in Virginia, executing a support agreement in Virginia, being ordered to pay spousal or child support by a court in Virginia that has personal jurisdiction, fathering or conceiving a child in Virginia, or having a marital domicile in Virginia prior to separation.

Venue is the proper place in Virginia where a Virginia case should be heard and is more concerned with the convenience of the parties.  Section 8.01-261(19) of the Code of Virginia sets forth the preferred venue for a divorce case as “the county or city in which the parties last cohabited, or at the option of the plaintiff, in the county or city in which the defendant resides, if a resident of this Commonwealth…” http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+8.01-261 .  If the defendant is served by publication, then the preferred venue is the city or county where the plaintiff resides.

You should consult with your Virginia divorce lawyer concerning the proper jurisdiction and venue of your divorce case.

Where a Virginia divorce court judge orders husband to pay a certain amount of support per month, decreasing each year for three years total, is this lump sum alimony payable in deferred payments or a periodic payment subject to modification by husband’s bankruptcy discharge of an equitable distribution award to wife?

In Dickson v Dickson , the Virginia Court of Appeals ruled that the award of spousal support was a periodic payment award subject to modification upon a change in circumstances such as husband’s bankruptcy discharge of the equitable distribution award to wife.    http://www.courts.state.va.us/opinions/opncavwp/1081954.pdf

The final decree of divorce entered in husband and wife’s divorce case provided for support, equitable distribution and attorney’s fees and costs.  The decree provided that husband would pay to wife a fixed monthly amount of support for three years, with decreases to lower fixed monthly amounts in each of last two years.  After entry of the divorce decree, husband filed a chapter 7 bankruptcy case and discharged over $620,000 in debt, including the equitable distribution award to wife.  The wife filed a petition to increase support based on a material change in circumstances, the bankruptcy discharge.  The husband responded by filing a petition to decrease support.  The Virginia trial court judge ordered husband to pay spousal support at the rate specified for the third year of the prior award to wife indefinitely until the death of either party or the remarriage of wife, subject to future modification.  The husband appealed the modification of support to the Virginia Court of Appeals. 

On appeal, the husband contended that the trial court did not have jurisdiction to modify the award pursuant to Code Section 20-109 because it was a lump sum award.  http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+20-109 .  Virginia Code Section 20-109 provides that upon the “petition of either party the court may increase, decrease, or terminate the amount or duration of any spousal support and maintenance that may thereafter accrue, whether previously or hereafter awarded, as the circumstances may make proper.”

The Virginia Court of Appeals ruled in favor of the wife.  The court noted that the final decree did not establish a final amount of support payable, even though a final amount could be calculated from the face of the decree.  The court also relied on the fact that the divorce court judge did not find special circumstances or compelling reasons requiring a lump sum payment.  In addition, the decree expressly characterized the support as a periodic payment.  Finally, the husband had applied for a modification of support himself, and would not be allowed to take contradictory and inconsistent positions.

The husband also contended that the discharge in bankruptcy was not a change in circumstances warranting a change in support.  The Virginia Court of Appeals noted that the trial court judge relied on the fact that wife would not receive the equitable distribution award that she had expected, an important factor in deciding on the amount of support under Section 20-107.1 (E)(8) of the Code of Virginia, http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+20-107.1 .  As this was a case of first impression, the Virginia Court of Appeals looked to case law from other jurisdictions, including Siragusa v. Siragusa, 843 P.2d 807 (Nev. 1992) http://scholar.google.com/scholar_case?case=1265692936806181210&q=siragusa&hl=en&as_sdt=2000000004 , from the Nevada Supreme Court, which recognized the tension between the federal supremacy clause and the equitable interests of the state in not allowing one spouse to deprive the other of marital property.  While the purpose of bankruptcy is to provide a fresh start to an honest debtor, the state has an even greater interest in resolving domestic disputes.  The Virginia Court of Appeals adopted the majority position that the discharge in bankruptcy was a change in circumstances justifying a modification of support, although the amount of alimony should not be a substitute for the amount discharged in bankruptcy.  The court noted that although husband’s income had decreased, his overall financial condition had improved following the discharge in bankruptcy as he still owned a vacation beach condo and a $50,000 matched asset plan while the wife was unemployed and without health insurance, and had nearly exhausted her retirement account.  The trial court’s decision was not plainly wrong or without evidence to support it.

You should consult with your Virginia bankruptcy or divorce lawyer to determine if your former spouse’s bankruptcy justifies a modification of support.