Can a wife collect mortgage and house insurance payments from the husband without violating the automatic stay in a Chapter 7 bankruptcy proceeding?
Not necessarily in the U.S. Bankruptcy Court for the district of Kansas, according to In re: Craig Michael Ullrich, Case No. 10-40329 (June 2, 2010). The reasoning of the Ullrich case may also apply to a bankruptcy case pending in the U.S. Bankruptcy Court for the Eastern District of Virginia, Richmond Division. In Ullrich, the ex-wife obtained a court order requiring the ex-huband, a debtor in a chapter 7 bankruptcy case, to appear in state divorce court to answer allegations that he had not fulfilled his financial obligations agreed to in the parties’ divorce. In response, the debtor husband filed a Motion for an Order to Show Cause in his bankruptcy case, alleging that his ex-wife had violated the automatic stay imposed by § 362 of the Bankruptcy Code.
The bankruptcy judge in Ullrich requested a copy of the underlying divorce documents to determine whether the issuance of a rule to show cause was appropriate. Husband and wife had prepared their own separation agreement or property settlement agreement, without benefit of counsel. A review of the documents showed that the debtor husband had agreed to pay $1700 a month for mortgage and house payments. The bankruptcy court judge tried to determine if the payments were intended to be construed as child support or a property settlement agreement. The U.S. Bankruptcy Court judge restated the rule that: “Section 362(b)(2)(B) specifically states that the filing of the bankruptcy petition does not operate as a stay “of the collection of a domestic support obligation from property that is not property of the estate.” The definition of a domestic support obligation includes anything that is “in the nature of alimony, maintenance, or support . . . without regard to whether such debt is expressly so designated.” 11 U.S.C. § 101(14A).
In this case, it was difficult for the court to ascertain if the $1700 a month for mortgage and house payments were child support. There were some indications that the payments were intended to be child support and not a property settlement agreement: 1) there was no marital property to be divided, no marital debts or spousal support; 2) The language in the Separation Agreement suggested that Debtor would support his children by paying the mortgage. However, there were also indications that the payments could be part of a property settlement agreement: 1) sworn Affidavit signed by Debtor stating that he has no child support obligation, but only a property settlement obligation arising out of divorce. 2) Debtor has custody of the parties’ third child. The debtor husband had responded to the controversy by filing a motion to convert his chapter 7 case to a chapter 13 case, in order to discharge non-domestic support obligation family law debts under 11 U.S.C. 523(a)(15).
The Court stressed that if ex-wife were indeed attempting to enforce a property settlement debt rather than a domestic support obligation, she will have violated “the automatic stay imposed by the Bankruptcy Code and could be liable for damages, including actual damages, attorney fees, and potentially punitive damages.” However, the Court denied the debtor’s Motion for an Order to Show cause, because the bankruptcy court judge could not definitively determine whether the husband’s obligation were “in the nature of” child support. In part, the Court had difficulty deciding the nature of the obligation since the ex-wife did not appear at the scheduled hearing.
Although the Court denied the debtor’s Motion for an Order to Show cause, the court used its equitable powers under Section 105 of the Bankruptcy Code, to stay the ex-wife’s motion and any similar proceeding, pending further order from the Court.
The Ullrich case illustrates the inherent risks in structuring particular obligations as support or property settlement obligations. Although the bankruptcy court judge will look beyond the labeling of the obligation to determine if it is truly in the nature of support, structuring an obligation as support in a separation agreement, without the benefit of counsel, may have unintended consequences in a later bankruptcy case.
You should consult with your Virginia bankruptcy and family attorney concerning the applicability of the automatic stay in a bankruptcy proceeding to any family law obligations.