Month: April 2015

Should I file for bankruptcy before divorce, or divorce before a bankruptcy?

The timing of a bankruptcy case or a divorce case in Virginia can be critically important.  There are important factors to consider when contemplating the timing of a bankruptcy and divorce case filing.

One factor to consider is the possibility of obtaining joint relief in bankruptcy.  A husband and wife may file a joint bankruptcy while they are married and both may obtain a discharge of their joint debts.  The discharge of the couple’s joint debts can eliminate a potentially contentious issue that a husband and wife might litigate in a contested divorce case, or that could hold up or prevent the spouses from reaching accord in a separation agreement or property settlement agreement.  Filing a joint bankruptcy case before a divorce could save the married couple from spending thousands of dollars in attorney’s fees and court costs or mediation fees.  Upon granting of a final decree of divorce, the former spouses would no longer be eligible for filing a joint bankruptcy case, and either would have to file an individual bankruptcy case limited to discharging his or her liability alone on a joint debt.

Either spouse may decide to file a bankruptcy before a divorce in order to preserve an asset for his or her use, or for the use of his or her spouse, or for equitable distribution by a Virginia circuit court judge in a divorce proceeding.  If a Virginia foreclosure sale is imminent, either spouse may file a chapter 13 bankruptcy case to preserve the equity in real estate in their joint names, or to save the former marital residence for continued occupancy by one or both of the spouses.

A spouse may decide to file bankruptcy before a divorce in order to take advantage of the tenancy by the entirety available only to married couples in Virginia.  If the parties have no joint unsecured debt, the tenancy by the entirety will protect property from the claims of either spouse alone, and from administration by the chapter 7 bankruptcy trustee, as long as they remain married.  Upon divorce, the tenancy by the entirety converts to a tenancy in common, and claims or liens against either former spouse may attach to the property.  A property that might not have been administered by a chapter 7 trustee in a filing by either spouse before entry of a final decree of divorce may thus become subject to administration in a filing after the entry of the divorce decree and the conversion of the tenancy by the entirety.

The type of relief needed by either or both spouses may be critically important to the timing of a bankruptcy or divorce.  In some instances, a spouse may wish to discharge attorney’s fees not related to support incurred in a divorce, or a spouse may wish to discharge, in a chapter 13 case, a claim arising out of separation or divorce that is not a domestic support obligation.  That spouse may wish to fully conclude the divorce, allow the claims to come into existence, and determine his or her liabilities before filing bankruptcy.  A spouse contemplating bankruptcy may also want to consider timing with respect to the possibility of a statutory lien for attorney’s fees attaching upon final judgment and the conclusion of disputes concerning marital property.  A husband or wife might also wish to consider the possibility of whether a bankruptcy filing would protect that spouse from being held in civil, non-punitive, contempt of court by a Virginia state court judge for failing to abide by the terms of a family law court order.

With the introduction of means testing in October 2005, either spouse must also consider how and whether income received during the last six (6) months before filing might create a presumption of abuse in a chapter 7 case filing and affect timing of the filing of a case.  Often an estranged spouse, who has been unemployed for a period of time, might lose eligibility for chapter 7 relief after returning to full employment for a sufficient number of months.

The timing of a bankruptcy or divorce case rests on the complex interplay of a number of factors, including the non-exhaustive description of the preceding factors.  You should consult with your bankruptcy or divorce lawyer to discuss how these and other factors may affect the timing of your c

Can separated spouses file or continue a joint bankruptcy case?

A husband and wife are allowed to file bankruptcy together for the sake of ease of administration, even if they are separated.  The married couple may benefit from the lower costs and fees of a joint filing and the ability to discharge joint debts completely.  A discharge of the couple’s joint debts can eliminate a potentially contentious issue in a Virginia divorce: who will pay each joint debt.  This can save the parties from costly attorney’s fees or mediation costs.  Although there is a potential conflict of interest when separated spouses file bankruptcy together, a separated couple might consider filing a joint chapter 7 case unless either one believes that together they are ineligible for chapter 7 relief, or the other spouse has engaged, or will engage, in some conduct that might jeopardize the successful completion of the case, such as transferring or concealing assets to defraud creditors, or committing perjury in the bankruptcy case about their property and debts.  When the spouses are separated, one spouse alone may be eligible for chapter 7 relief by excluding the other spouse’s income with a declaration of separate households.

A chapter 13 case presents greater difficulties than a chapter 7 case for separated spouses because of the ongoing obligation to make plan payments, the evolving goals of husband and wife during the bankruptcy and separation, and the ability of the husband or wife to discharge debts that are not domestic support obligations but that are related to divorce and separation.  The spouses may have different goals and interests: one spouse may prefer liquidation over a plan bankruptcy, or a spouse may not care to preserve a particular asset, or cure an arrearage on a mortgage on real property with no equity that serves as one spouse’s residence.  A major point of contention may be whose income will be used to fund the chapter 13 plan payments.

When a couple separates during a chapter 13 case, counsel may be compelled to withdraw due to an actual conflict of interest between the spouses.  In such an event, the chapter 13 case can be deconsolidated into two separate bankruptcies, allowing each spouse to continue or to convert or dismiss his or her case without the consent of the other spouse.

You should consult with your bankruptcy or divorce lawyer to determine if a joint bankruptcy is in your best interest, based on all the facts and circumstances of your particular situation.

Is my real estate vulnerable to creditors when I divorce?

Most married couples in Virginia hold title to real estate as tenants by the entirety with the common-law right of survivorship.  This type of tenancy is based on the old common-law notion that a husband and wife were a single legal person.  Both parties own the entire property together such that when one of them dies, the property does not even pass from one to the other, but instead the surviving spouse remains the owner of the entire property.  In Virginia, a tenancy by the entirety is protected from the creditors of either husband or wife alone, except for super-creditors like the Internal Revenue Service (IRS).  Thus ordinary claims of either spouse will not become a lien on the title while it remains a tenancy by the entirety.  As discussed in the answer to the question “Am I responsible for my spouse’s debts?” a judgment lien for either spouse’s obligation to pay the other spouse’s necessaries will not attach to the couple’s real property held as tenants by the entireties with the common-law right of survivorship.

In Virginia, upon entry of a decree of divorce from the bond of matrimony, any real estate held by husband and wife as tenants by the entirety converts to a tenancy in common.  A final divorce extinguishes the right of survivorship, one of the essential elements of the tenancy.  Under the new tenancy, the liens of either husband or wife can now attach to that party’s interest in the real property.

While the property is held as tenants by the entirety, both husband and wife must join in a deed to convey good title to real estate.  Under Virginia law, when a party conveys property that the party subsequently acquires, the deed will affect the title as if the party owned the property at the time the conveyance was made.  Thus, a spouse may grant a deed of trust on real property that would be ineffective while the parties are married and the real property is held by the parties as tenants by the entirety, but the transfer may become effective upon the entry of the final decree of divorce as a lien on that spouse’s interest in the real estate (without prejudice to the rights of third parties Hausman v. Hausman, 233 Va. 1, 353 S.E.2d 710 (Va., 1987).

You should consult with your bankruptcy, divorce or real estate attorney, to discuss the applicability of the foregoing concepts to the facts of your particular situation.

 

Will my spouse’s bankruptcy filing damage my credit?

A bankruptcy filing appears in the public record section of an individual’s credit report and should not be reported on the non-filing spouse’s credit report.  The bankruptcy does not result in removal of accounts reported in a credit report.  Instead, the account credit history may reflect a zero balance with a notation that the debt has been discharged in bankruptcy.  As discussed in greater detail in the answer to the question, “What happens to joint debts in one spouse’s bankruptcy?”, a non-filing spouse will not receive the benefit of his or her spouse’s discharge of a joint debt and the account history of a joint debt will reflect any delinquency or nonpayment of the joint debt by the parties.

Do I have to include my spouse’s income for means testing if I file an individual bankruptcy while my spouse and I are living separate and apart under same roof?

Virginia law recognizes that a husband and wife may live separate and apart under the same roof in certain instances where the spouses have ceased all marital relations, do not hold themselves out to the world as husband and wife, no longer pursue joint activities, and no longer maintain joint finances, but instead live like unrelated roommates in the same dwelling.  Not all circuit court judges are equally accepting of the concept of living separate and apart under the same roof.

A final decree of divorce in Virginia may be based on a couple living separate and apart for a year with at least one of the spouses intending for the separation to be permanent.  Where the couple have no children and have entered into a separation agreement, a final divorce may be granted after the couple have lived separate and apart for six months.  A husband and wife may decide to live separate and apart under the same roof for financial reasons, because it would be too costly to maintain separate households in their circumstances.  In addition, divorce counsel may advise a spouse not to leave the marital residence unless and until the parties executed a separation agreement for various tactical reasons, including support issues, child custody issues, equitable distribution issues, and the avoidance of stronger evidence supporting a desertion or abandonment.

Although the couple may be living separate and apart for purposes of obtaining a no-fault divorce in Virginia, it is unclear whether this type of separation would be considered a sufficient separation for bankruptcy means-testing purposes.  An individual who is married, and not filing jointly, may exclude the other spouse’s income from means testing by executing the following declaration of separate households:

“My spouse and I are legally separated under applicable non-bankruptcy law or my spouse and I are living apart other than for the purpose of evading the requirements of  §707(b)(2)(A) of the Bankruptcy Code.”

Virginia does not really have a “legal separation” as some states do.  Spouses may live separate and apart with a separation agreement, a contract in which they recognize their separation, or either spouse may file for a divorce from bed and board (a divorce a mensa et thoro), a non-final divorce in Virginia based on cruelty or desertion that does not dissolve the marital relationship or allow the parties to remarry.

You should consult with a Virginia bankruptcy or divorce lawyer to discuss your particular situation.

 

What happens to joint debts in one spouse’s bankruptcy?

The discharge in bankruptcy is personal to the debtor spouse and does not extinguish a joint debt for the spouse who did not file bankruptcy.  The debtor spouse is no longer liable for that particular joint debt to the creditor, but the non-filing spouse remains liable to the creditor for the full amount of the debt.

In Virginia, a separation agreement or court order can allocate debt between spouses.  One spouse can agree, or be ordered to pay, a joint debt and to hold the other spouse harmless from the debt.  While this can affect the liability between the spouses, it does not affect the liability to the creditor who was not a party to the contract or the divorce case.  In the absence of a bankruptcy discharge, the creditor may sue either or both spouses for satisfaction of a joint debt.  With a bankruptcy discharge of one spouse, the creditor may look to the other spouse for full payment of the joint debt.

As discussed in the answer to the question, “Can my spouse discharge family law debts in bankruptcy?”, a spouse may only discharge non-domestic support obligation debts to the other spouse, related to separation and divorce, in a chapter 13 case and not in a chapter 7 case.

A challenging issue is the Virginia court’s right to use its contempt of court powers when a spouse fails to pay a debt discharged in bankruptcy.  You should consult with a bankruptcy or divorce lawyer to discuss your particular situation.

 

Can my spouse discharge a family law debt in bankruptcy?

It depends on the type of debt and whether your spouse filed a chapter 7 bankruptcy or a chapter 13 bankruptcy.  Some family law debts can be discharged in chapter 13.

Domestic support obligations like alimony and child support are not dischargeable in either chapter 7 or chapter 13 bankruptcy.  A domestic support obligation has four elements:

1. It is owed to, or recoverable by the government or a spouse, former spouse, child of the debtor, or the child’s parent, legal guardian, or responsible relative.
2. It is in the nature of alimony, maintenance, or support of the spouse, former spouse, child of the debtor or the child’s parent.
3. Established or could be established under a court order or divorce decree, separation agreement or property settlement agreement, or by an administrative proceeding before a governmental unit like the Virginia Department of Social Services, Division of Child Support Enforcement.
4. The debt was not assigned to a nongovernmental unit, unless it is assigned by a person in paragraph 1 above for purpose of collection.

Debts owed to a spouse, former spouse, or child of the debtor that are not domestic support obligations and that is incurred by a debtor in a separation, divorce, separation agreement, property settlement agreement, court order or decree, or a determination by a governmental unit may be discharged in a chapter 13 case, but not in a chapter 7 case.

 

Am I responsible for my spouse’s debts?

In Virginia, a spouse is not ordinarily liable for his or her spouse’s individual debts (or tort liabilities) simply by virtue of the marriage.  However, Virginia has codified the common-law doctrine of necessaries, which made a husband liable for his wife’s necessary living expenses such as shelter, food and medical care.  Under Virginia law, the doctrine of necessaries now applies equally to husband and wife, except when the spouses are permanently living separate and apart.  The doctrine of necessaries may make a spouse liable to a third party who supplies necessary goods or services, but not to his or her spouse in need.  A lien for necessaries will not attach to property held by the spouses as tenants by the entirety with the common-law right of survivorship.

Will a bankruptcy filing stop my divorce proceeding?

One of the benefits of filing bankruptcy is the automatic stay that generally prevents creditors from proceeding against the debtor, the debtor’s property, or property of the estate to collect a pre-filing debt.  This protection allows for the orderly administration of the debtor’s case.  In family law matters, bankruptcy law balances the rights between spouses as debtor and creditor, and all of the creditors of the debtor spouse.  There are numerous family law exceptions to the automatic stay.  A bankruptcy may not stop an action to do any of the following:

• Establish paternity
• Establish domestic support obligations
• Determine or modify child custody or visitation
• Obtain a divorce without equitable distribution or division of property and debts
• Address family abuse
• Collect support from property that is not property of the estate or report overdue support
• Withhold income for payment of a domestic support obligation

The bankruptcy court is concerned about the property subject to the claims of creditors and the possibility of collusion, that is, that a husband and wife may act together under the pretext of a divorce to defeat their creditors.

If property is involved, the safest way to address these concerns is to seek relief from the automatic stay in order to continue the divorce proceeding in spite of the bankruptcy filing.  You should consult with your bankruptcy or divorce attorney about the automatic stay and its effect on your divorce.

Not only do love and marriage go together like a horse and carriage, unfortunately so do divorce and bankruptcy.  Marriage is viewed as a partnership in Virginia, with husband and wife each contributing, in good faith, their best efforts toward the common good of the relationship.  Married couples often stretch their finances, sacrificing short-term security for long-term prosperity, in expectation of the stability of their union.  Few newlyweds expect to divorce, and even fewer expect to ever file bankruptcy due to the dissolution of their marriage.

Despite these expectations, divorce is a fact of life.  Nearly half of all marriages do not survive. Most people do not execute prenuptial agreements.  Separation and divorce can bring tremendous, devastating financial stress for both husband and wife.  The unanticipated costs of maintaining two households instead of one, the burden and uncertainty of support obligations, and the demands of paying attorney’s fees and costs in a contested divorce case can easily bring financial distress leading to insolvency or bankruptcy.

Similarly, financial distress can lead to marital discord.  Even a happy marriage can be pulled apart by the blame, guilt, uncertainty and anxiety resulting from a bankruptcy proceeding.  If one spouse alone obtains a discharge, the other spouse may be left responsible for a joint debt.  Bankruptcy tests a marriage, and, unfortunately, many marriages cannot survive that test.

The federal bankruptcy courts in Virginia and the Virginia Circuit Courts have some shared powers over separation and divorce.  This blawg explores the curious intersection between federal bankruptcy law and Virginia family law with an eye toward providing general information to the unfortunate participants caught in that intersection.

This blawg is not intended to be a substitute for legal advice and should not be relied on for particular legal advice.  Both bankruptcy law and family law are fact specific.  Legal outcomes may vary depending upon all the particular facts.  In addition, family law is primarily state law, which varies from state to state; this blawg addresses only family matters in the Commonwealth of Virginia, and not in any other states. A lawyer can only provide you with accurate legal advice after learning all the facts and circumstances of your particular situation.  You should consult with an attorney concerning any legal matter discussed in this blawg before taking any action, or not acting, in reliance on the information contained herein.

James H. Wilson, Jr. is a debt relief agency.  James H. Wilson, Jr., helps people file for bankruptcy relief under the bankruptcy code.

Richmond Divorce Lawyer James H. Wilson, Jr.

James H. Wilson, Jr.

Attorney & Counsellor at Law

4860 Cox Road, Suite 200

Glen Allen, Virginia 23060

(804)740-6464