Can attorney’s fees be considered a domestic support obligation in bankruptcy?

Can attorney’s fees be considered a domestic support obligation in bankruptcy?

Yes, in the case of In re Uzaldin, 418 B.R. 166 (Bnkr. E.D.Va. 2009), where the United States Bankruptcy Court for the Eastern District of Virginia ruled that the prepetition final divorce decree’s award of attorneys fees to debtor’s former spouse was a domestic support obligation because the fees were awarded as part of the parties’ divorce litigation which included issues of child custody, spousal support, child support, and property settlement. See 11 U.S.C.A. § 101(14A) . This classification is important because domestic support obligations are entitled to priority status, are nondischargeable in every type of bankruptcy, and must be paid in full under a Chapter 13 plan. In contrast, property settlement and equitable distribution debts do not have priority, may be dischargeable in a Chapter 13 case (but not usually in a Chapter 7 case), and need not be paid in full in a Chapter 13 plan. See 11 U.S.C.A. § 507(a)(1) .

In Uzaldin, the litigation arose out of the Debtor’s objection to the classification, but not amount, of the proof of claim filed by the Debtor’s ex-wife.   Notable in the divorce case had been the judge’s finding of marital waste by the Debtor through the transfer of assets to his mother and his voluntary underemployment.   The Debtor had allowed the marital residence to go to foreclosure with a loss of nearly $200,000 in equity.  The proof of claim consisted of $195,000 in equitable distribution for equity in the home, $30,000 in attorney’s fees and an offset of $5,500 for the wife’s share of a marital debt.  The judge ruled that the nature of attorney’s fees follows from the nature of the principal award.  There was no evidence that permitted the court to apportion the attorney’s fees between the custody, spousal support, and child support issues and the equitable distribution issues.    The bankruptcy judge ruled that where the Debtor presents no evidence on the nature of the attorney’s fees, then the former spouse’s proof of claim, executed and filed in accordance with the Federal Rules of Bankruptcy Procedure, constituted prima facie evidence of the validity and the amount of the claim under Bankruptcy Rule 3001(f), and controls.

Additionally, the Uzaldin court raised sua sponte whether this bankruptcy case had been filed in bad faith, in accordance with the court’s powers under 11 U.S.C. 105. A Chapter 13 bankruptcy petition may be dismissed and a Chapter 13 plan may be denied confirmation if filed in bad faith. See 11 U.S.C.A. §§ 1307(c).  Here, the Chapter 13 debtor’s objection to former spouse’s claim raised troubling questions about his good faith in both filing the petition and proposing the chapter 13 plan. The Uzaldin court restated the rule that it will not dismiss the bankruptcy petition for bad faith unless certain factors discussed in the Seventh Circuit’s Love decision were met including: the nature of the debt, whether the debt would be nondischargeable in a Chapter 7 proceeding, the timing of the petition, how the debt arose, the debtor’s motive in filing the petition, how the debtor’s actions affected creditors, the debtor’s treatment of creditors before and after the petition was filed, and whether the debtor has been forthcoming with the bankruptcy court and the creditors. In re Love, 957 F.2d 1350 (7thCir.1992).  Due to several of these factors being met, the court issued a notice to show cause why the case should not be dismissed for have been filed in bad faith.

You should consult with your Virginia bankruptcy lawyer regarding the dischargeability of attorney’s fees arising out of your family law matters.

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