The Interplay Between Bankruptcy and Divorce Law in Virginia

Can a chapter 7 bankruptcy trustee avoid and recover a transfer of real property in an unrecorded Final Decree of Divorce in Virginia?

Yes, in the case of Phillips v. Chandler,  215 B.R. 684 (E.D. Va. 1997), the United States District Court for the Eastern District of Virginia reversed a bankruptcy judge’s decision and allowed the chapter 7 trustee to avoid and recover a transfer from a husband to a wife, based on the trustee’s strong-arm avoidance powers based on his status as a hypothetical judicial lien creditor in 11 U.S.C. §544(a)(1).  The Phillips v. Chandler case illustrates the benefits of recording divorce decrees and separation agreements or property settlement agreements in the appropriate county land records in Virginia, to best protect the interests of a spouse when either former spouse might later file bankruptcy.

In Chandler, the husband and wife were divorced in the Circuit Court of Hanover County Virginia.  Under the terms of the Final Decree of Divorce, the real property, which had been owned by the husband and wife as tenants by the entirety with the common-law right of survivorship, was transferred to the wife by virtue of Virginia Code Section 20-107.3(C) , which gives the Virginia divorce court judge authority to divide or transfer jointly owned marital property and jointly owned marital debt under Virginia’s equitable distribution statute.   In Virginia, by operation of law, Section 20-111 of the Code of Virginia, the survivorship in a tenancy by the entirety is terminated, thus converting the tenancy into a tenancy in common, with each spouse owning a half interest, unless otherwise indicated.  Thus, each former spouse’s interest in the real property, which was previously protected from the creditors of each spouse alone by the tenancy by the entirety, becomes subject to the liens of judgment creditor under Virginia Code §8.01-434.  Because of this consequence, Virginia divorce lawyers are advised to record a deed from both spouses to the recipient spouse prior to the entry of the divorce decree where there are recorded judgment liens or other interests of the transferring spouse which may attach if the tenancy should convert to a tenancy in common.

The husband in Chandler filed chapter 7 bankruptcy after the parties’ divorce was finalized, but before the divorce decree was recorded.  The chapter 7 trustee in the husband’s bankruptcy case filed a motion to avoid and recover the transfer of husband’s interest in the real property to wife, based on his strong arm powers as a hypothetical judicial creditor who extends credit to the bankruptcy debtor at the time of the filing of his case and obtains a judicial lien on all property on which a creditor could have obtained, regardless of whether such a creditor actually exists.  The bankruptcy court judge, relying on Barnes v. American Fertilizer Co., 144 Va. 692, 130 S.E. 902 (1925), granted the husband Debtor’s motion to dismiss and motion for summary judgment on the grounds that the requirements of Virginia’s recording statute, found in Virginia Code §55-96(1)(A) , (which did not expressly include divorce decrees) cannot operate to void a transfer of real property in a divorce decree, even though the final decree of divorce was not yet recorded, as required under Virginia Code §20-107.3.

The United States District Court for the Eastern District of Virginia reversed and remanded the case to the bankruptcy court judge for damages.  The federal district court first recognized that a federal court interpreting state legislation must use that state’s rules of statutory construction, such that a court must assume that the legislature is familiar with existing Virginia case law and that a statute may not be construed in such a way to cast doubt on the otherwise clear language of a related statute.   The federal court found that the purpose of Virginia’s enactment of both the recording statute and the equitable distribution statute decree recording provision was to promote public notice and to eliminate hidden or unrecorded interests in real estate.  The court further held that the recording requirement of the Virginia equitable distribution statute was an absolute determinant of the validity of property transfers in divorce decrees.  The common law holding of Barnes was necessarily overruled by the enactment of the Virginia statutes.  The district court judge ruled that the Virginia recording statute must be broadly read and interpreted to include the recording requirements of the Virginia equitable distribution statute, such that it implicitly includes the recording of divorce decrees to give public notice.  Consequently Virginia Code Section 55-96(A)(1) voided the transfer of real property in the unrecorded final decree of divorce and the trustee would be able to avoid the husband’s transfer of his half interest to the wife using his strong arm powers in Bankruptcy Code Section 544(a)(1).

You should consult with your Virginia bankruptcy and divorce attorney or Richmond Divorce lawyer James H. Wilson, Jr., to discuss the effects of your former spouse’s bankruptcy on the results of your divorce case.

Would an unscheduled asset which the chapter 7 trustee had partially administered be deemed abandoned to the debtor’s ex-wife?

Yes, in the case of In re DeGroot, Case No: 11-8083 (BAP 6^th Cir., 2012), the Bankruptcy Appellate Panel for the Sixth Circuit upheld the decision of the U.S. Bankruptcy Court for the Western District of Michican, ruling that the asset was properly deemed to have been abandoned to the ex-wife under 11 U.S.C. §554(c) and (d).

In the DeGroot case, the husband and wife were divorced in 2002.  Husband was ordered to pay child support to the wife for two children.  The wife was awarded the house and ordered to pay husband for his share of the marital equity in three installments, the first after three months, the second after seven years, and the bulk upon the emancipation of the youngest child, the sale of the house, or the death or remarriage of the wife.  Under the divorce decree, the entire amount owed to husband by wife was, in effect, a judgment lien against the title to the real property.

After the first payment was made, the husband filed a no-asset chapter 7 bankruptcy case.  The husband listed the wife as a creditor in his chapter 7 case, but did not properly schedule his right to receive payments from her for his marital share or his security interest in the former marital home.

Meanwhile, the wife filed a show cause against the husband in state court to collect the delinquency in child support owed.  The husband and wife entered into negotiations to settle their differences.  The husband Debtor’s bankruptcy attorney informed the chapter 7 trustee of the child support arrearage and asked the trustee, in several letters, to abandon the bankruptcy estate’s interest in the lien for the balance owed by wife to husband.  The husband and wife’s negotiated settlement provided that wife would give up or waive any past or future child support owed in return for a lump sum settlement payment from husband to the wife and a release of his lien on the former marital residence.  Although the state court judge approved the proposed negotiated settlement, neither the Debtor husband nor the wife had first sought relief from the automatic stay to enter into a negotiations, as required by 11 U.S.C. § 362 (thus creating a voidable agreement).

The chapter 7 trustee filed a notice of assignment of lien in land records and had the bankruptcy case noticed as an asset case.  The wife failed to file a proof of claim in the husband’s chapter 7 bankruptcy case.  Nine months later, the chapter 7 trustee filed a Report of No Distribution (“NDR”) and the case was closed.

When the wife later attempted to refinance the former marital residence, the trustee’s notice of assignment came up in the title search.  The trustee refused to release the assigned lien on the home because the parties had not first obtained relief from the stay before reaching the negotiated settlement.  The bankruptcy court granted the chapter 7 trustee’s subsequent motion to reopen the case to administer the asset.  The trustee then subordinated his lien in return for a small lump sum payment to allow the wife to consummate her much needed refinance loan.  The wife filed a motion and a proof of claim for unpaid child support in excess of the amount of the lien claimed by the trustee.

 

After a hearing, the bankruptcy court judge ruled that the trustee could administer the small lump sum payment, but could not administer the rest of the balance as it was deemed abandoned under 11 U.S.C. §554(c) and (d). with the closing of the case. In re Joel DeGroot, 460 BR 159 (2011).  The court ordered the chapter 7 trustee to release his lien against the former marital residence.  The court found that the negotiated settlement was voidable as obtained in violation of the automatic stay, and determined that there were no equitable considerations against setting it aside.  Consequently the receivable was still valid and the wife had a valid claim for setoff against the estate for child support under 11 U.S.C. §553.

With regard to the Debtor’s failure to properly schedule the asset and the chapter 7 trustee’s failure to administer it, the court held the “…unless the court orders otherwise..” language in Section 554(c) and (d), gave the court the discretionary ability to avoid a miscarriage of justice.  Here, the trustee and the Debtor were at fault, not the ex-spouse.

The chapter 7 trustee appealed.  The Bankruptcy Appellate Panel upheld the bankruptcy court’s ruling, reaffirming that the bankruptcy court judge had the discretion both to modify or revise any technical abandonment (caused by closure of the case) and to excuse any nondisclosure of financial information.  The court was within its discretion to deem the asset abandoned to the ex-spouse pursuant to the “…orders otherwise…” language of 11 U.S.C. §554(c) and (d) to prevent a miscarriage of justice.  The appropriate circumstances supporting that exercise of discretion included the fact that the Debtor failed to schedule the asset but did disclose it, that the trustee knew of the asset and did not administer it, that the trustee caused the case to be noticed as an asset case, and that the trustee filed the notice of lien in land records.  The BAP also noted that the only one who suffered from all the defaults was the ex-spouse.

You should consult with your bankruptcy and divorce attorneys or Virginia bankruptcy and divorce lawyer James H. Wilson, Jr., to discuss your rights in property when your spouse or ex-spouse files bankruptcy.

 

To what extent may a bankruptcy trustee avoid a transfer of real property from one spouse to another incident to a divorce settlement?

A trustee may avoid a transfer and obtain a money judgment against a non-debtor ex-spouse to the extent that the Debtor spouse did not receive reasonably equivalent value in return for the transfer of real property, as shown by In re Neal, No. 11-8081 (2012), a 6^th Circuit Bankuptcy Appellate Panel case.

Before signing the separation agreement, the wife in the Neal case paid off in full the second mortgage/home equity line of credit on the former marital residence in the amount of $28,000 by a loan from her parents.  The wife conveyed her half interest in the former marital residence to the husband by a Quit Claim Deed (a deed containing no warranties).  The real property was shown to be worth approximately $77,000 with a $50,000 first mortgage, so there was effectively no equity when the Wife paid off the home equity line of credit, and only $27,000 when she conveyed her half interest to her husband.  In the separation agreement, the Husband and Wife agreed that the Wife had waived, or given up, any interest in the former marital residence.  The Husband assumed sole responsibility for payment of the mortgage on the real property.

The property settlement agreement provided that the Husband would keep a vehicle and two motorcycles while the Wife would keep an older vehicle and her pension.  The Wife and Husband also agreed that Husband had sole ownership of his separate property, which included two lots and several more vehicles.

As is the customary legal practice in Virginia, the Ohio divorce court approved and incorporated the separation agreement between the parties into the final decree of divorce.  Six months later, the Debtor wife filed a chapter 7 bankruptcy case in the U.S. Bankruptcy Court for the Northern District of Ohio, Eastern Division.  Fifteen months later, after the Debtor wife received her discharge in bankruptcy, the chapter 7 bankruptcy trustee filed an adversary proceeding against her ex-husband to avoid and recover the value of the constructively fraudulent transfer of real property to him, relying on the trustee’s avoidance powers contained in Bankruptcy Code Sections 548(a) (11 U.S.C. §548(a)), 544 (11 U.S.C. §544),  and 550 (11 U.S.C. §550),  and Ohio state fraudulent conveyance statutes.

In response to the trustee’s allegation that the Debtor wife did not receive reasonably equivalent value for the transfer of real estate, the ex-husband alleged that he would have likely received spousal support, continued health insurance, and half the Debtor’s pension had the case been tried in divorce court.  He also contended that the Debtor’s credit card debt and debt to her parents for the loan to pay off the home equity line of credit (which she discharged in bankruptcy) would not have been considered marital debt for which he might have been held liable.

At trial in the bankruptcy court, the evidence demonstrated that the Debtor was the primary breadwinner and the spouse who managed the household finances.  Most of the debts during the marriage had been incurred in the Wife’s name alone, but had been used for family or marital purposes.  The bankruptcy court held that the Debtor had made a prepetition transfer of an interest in property, that the transfer had been made within 2 years of filing bankruptcy, and that the Debtor was insolvent at the time the transfer was made due to the amount of debt the Debtor had assumed and the short period of time between the entry of the divorce decree and the filing of the chapter 7 bankruptcy case.

In deciding whether the Debtor had received reasonably equivalent value for the transfer of real property to her husband, the court analyzed state law rather than bankruptcy law.  The court noted that Ohio’s equitable distribution law presumes an equal apportionment of property and debt between the husband and wife, unless such a division would be inequitable.  Since both parties were capable of supporting themselves, there would not likely have been an award of spousal support and there was no evidence of a waiver of any rights to further health insurance in the separation agreement or the divorce decree.  The bankruptcy judge found that although the ex-husband would likely have been entitled to half the wife’s pension, worth about $9,000, he would have been responsible for half the substantial credit card debt and loan to her parents in the sum of approximately $90,000.

The bankruptcy court judge further held, sua sponte, that the analysis of reasonably equivalent value underlying the trustee’s avoidance action was not precluded by collateral estoppel due to a provision in the separation agreement which characterized the exchange of value as “fair and equitable”, because the bankruptcy proceeding and the divorce had different policy goals, citing In re Fordu,  201 F.3d 693 (6^th Cir., 1999), where the 6^th Circuit noted that the standards for determining fair and equitable in context of the domestic relations arena are different from determining reasonably equivalent value in the context of a bankruptcy avoidance action.

On appeal, the Bankruptcy Appellate Panel (BAP) first decided that the “fair and equitable” provision in the state divorce decree would not be given any preclusive effect in this bankruptcy avoidance action.  The court further held that the purpose of the trustee’s avoidance powers under 11 U.S.C. §550 against a transferee like the ex-husband was to restore the bankruptcy estate to the position it would have been in if the transfer had not been made. The BAP recognized that the only issue in dispute on appeal was that of reasonably equivalent value.

The Bankruptcy Appellate Panel concluded that the bankruptcy court had erred in its analysis of reasonably equivalent value by considering the amount of unsecured debt assumed by the Debtor wife, since it appeared the husband would not have been liable for the credit card debts in the wife’s name, and there was no evidence that the husband was liable to her parents for the loan to pay off the home equity line of credit.  Consequently, by assuming these debts in the divorce case, the Debtor wife had not conferred a benefit upon her ex-husband.  In addition, the liability of the ex-husband to the trustee was limited to the difference between the value transferred and reasonably equivalent value.  In this case, the Wife traded her interest in half the equity in the former marital residence worth $13,750 in exchange for the Husband’s release of his half interest in her pension worth $9,217.02.  Thus the ex-husband’s liability to the trustee was limited to the difference in the amount of $4,532.98.  Finally, the BAP determined that the bankruptcy court was not required in an avoidance action to determine the likely outcome of a contested divorce case when analyzing reasonably equivalent value, it was only required to compare the value transferred to the value received in the marriage dissolution.

You should consult with your Virginia divorce and bankruptcy law lawyer or Richmond Divorce and Bankruptcy Law Lawyer James H. Wilson, Jr., to discuss your actual or potential liability to a bankruptcy trustee for transfers to or from your spouse in connection with a Virginia divorce case.

How to file bankruptcy in Virginia after filing for divorce:

It may be advantageous to file bankruptcy in Virginia after filing for divorce, depending on the particular circumstances and timing of your cases, and the relief you seek.  The actual mechanics of filing the bankruptcy itself are fairly straight forward.  You can file yourself, use a bankruptcy petition preparer, or use a lawyer who has been admitted to practice in the U.S. Bankruptcy Court.  The official forms required for filing bankruptcy are posted on the website for the U.S. Bankruptcy Court for the Eastern District of Virginia.  Before filing bankruptcy you must complete a required credit counseling course from a provider approved by the U.S. Trustee’s office, or request an exception for certain grounds.  You must pay the filing fee in whole when you file, or you may ask the court for permission to pay in installments.  About a month after filing bankruptcy, you will be required to attend a scheduled meeting of creditors, where the trustee appointed in your case will ask you certain questions.  Creditors have a right to attend this meeting, but rarely show up.  In order to receive a discharge in a chapter 7 case, you must also complete a required debtor education course from an approved provider no later than sixty days after your meeting of creditors and file a certification with the court.  In a chapter 13 case, you must complete the required debtor education before completing your plan payments and receiving a discharge.  In the event you elect to reaffirm a debt in your chapter 7 case, you may have to attend a hearing concerning whether the court will approve the proposed reaffirmation agreement.

After filing for divorce, you should consider several issues before filing a bankruptcy case in Virginia.  First, should you file a joint bankruptcy case with your spouse after filing for divorce?  You and your spouse are eligible to file a joint case while you are still married.  A joint bankruptcy case may save you both in fees and costs and will discharge your dischargeable marital debts (along with your dischargeable separate debts), which are often a point of contention in divorce cases.  By getting rid of your marital debts in bankruptcy, you have eliminated an area to litigate in equitable distribution in your divorce case, or an area that may prevent you from negotiating a separation agreement or property settlement agreement.  You should consider whether there is actual conflict of interest with your spouse before filing a joint case.  While a joint chapter 7 case for estranged spouses may make sense, it is much more difficult to justify a joint chapter 13 case after filing for divorce because of the ongoing responsibilities and payments required in chapter 13, and the potential for one spouse to discharge a debt to the other spouse.  You should also consider whether your spouse might have engaged in some conduct which could jeopardize your prospects for obtaining bankruptcy relief, such as transferring or concealing assets to defraud creditors, submitting false or fraudulent loan applications, or withdrawing large amounts of cash or buying luxury items with no intention of repaying the debt.

Second, what kind of bankruptcy case should you file after you have filed for divorce in Virginia?  The answer to this question will depend on the relief you seek and the nature of your debts.  Some folks need bankruptcy protection to preserve valuable property, such as the marital residence, so it will be available for equitable distribution in Virginia.  Other filers primarily need a discharge of credit card debt, or protection from a garnishment of wages or a bank account.  Chapter 13 bankruptcy discharges a broader range of family law debts than chapter 7 bankruptcy will.    Domestic support obligations, such as alimony, child support, or spousal support are not dischargeable in either chapter 7 bankruptcy or chapter 13 bankruptcy.  Other debts owed to a spouse, former spouse or child of the debtor which are not domestic support obligations and that were incurred in a divorce or separation, or in a separation agreement or property settlement agreement, or from a divorce decree or court order of a court of record, may be dischargeable in a chapter 13 bankruptcy case, but are not dischargeable in a chapter 7 bankruptcy case.

Third, what is best time to file for bankruptcy after filing a divorce in Virginia?  The timing of a bankruptcy case filing can be critically important, and has been addressed in detail in a separate page in this blawg:  “Should I file for bankruptcy before divorce, or divorce before bankruptcy?”.  Certainly, if you wish to discharge family law debts that are not domestic support obligations in a chapter 13 case, it is important that those claims have come into existence, and are not merely potential claims.  All other factors being equal, you may wish to wait until the conclusion of equitable distribution or the execution of a separation agreement or property settlement agreement, or the entry of a divorce decree or other court order, before filing for chapter 13 bankruptcy relief.  The downside to waiting is the possibility that the nonpayment of a particular obligation required by the court may potentially subject the debtor to a contempt of court charge.

Fourth, will you need relief from the automatic stay in bankruptcy to continue or conclude your divorce case?  The automatic stay in bankruptcy allows a spouse to seek the dissolution of a marriage, as long as the spouse does not seek equitable distribution of property of the bankruptcy estate.  The safest course is to file a motion for relief from the automatic stay in a chapter 13 bankruptcy case or in a lengthy chapter 7 case, before proceeding with equitable distribution in your divorce case, or entering into a separation agreement or property settlement agreement if you intend to affect marital property or debts, or even post-petition earnings of the debtor, which are property of the estate in a chapter 13 case.  Actions taken in violation of the automatic stay are void.  The cost of seeking relief from stay may be small compared to the consequences of a void separation agreement or void equitable distribution decree.

You should consult with your Virginia bankruptcy and divorce lawyer, or Richmond divorce lawyer James H. Wilson, Jr., to discuss the advantages and disadvantages of filing bankruptcy after divorce.

Can the chapter 7 bankruptcy trustee recover property transferred from the debtor divorced wife to her parents on fraudulent transfer grounds where the property transferred would have been exempt under state law?

In the case of Sullivan v. Welsch, 457 B.R. 748 (B.A.P. 8^th Circuit, 2011), (In re: Mary Lumbar, Case No: 11-6018), the bankruptcy appellate panel for the Eighth Circuit Court of Appeals rejected the “no harm, no foul” rule and held that the debtor ex-wife might have fraudulently transferred property to her parents, even though the property would have been exempt under state law.

The wife’s parents entered into an installment sales contract or contract for deed for the purchase of certain real property, the title to which would remain with the parents until the contract payments were paid in full, at which time title would be conveyed to the married couple.  Under the contract, the husband and wife were to make installment payments and two balloon payments to the wife’s parents over the course of seven years, with the final balloon payment paying off the contract in full.  The contract for deed was recorded in land records after it was fully ratified.  The husband and wife failed to make the first balloon payment.  The parents continued to accept installment payments from the couple and subsequently transferred the contract to themselves as trustees of their living trust.  The husband and wife failed to make the second and final balloon payment.  Nevertheless, the wife’s parents continued to accept monthly payments from the couple.  Five years later, the husband filed for divorce from his wife.  The parents then declared a default in contract for deed.  As the property had appreciated in the interim from the contract sales price of approximately $150,000 to more than $560,000, with a balance due of only $188,000, the husband took legal action against his wife, her parents, and their family living trust to enforce the contract for deed and realize the appreciation in value.  The state court legal actions were settled with a cash payment from the wife’s parents to the husband in return for a release of his rights in the real property and his rights to other marital property.  In accordance with the comprehensive settlement, the husband and wife quit claimed their equitable interests in the real property to the wife’s parents.  The wife’s quit claim deed to her parents was not recorded.  A year later, the wife filed a chapter 7 bankruptcy case without listing any interest in the real property or claiming any exemption in it.

The chapter 7 trustee filed an adversary proceeding to set aside the transfer and recover the real property as an unperfected, voluntary and fraudulent transfer under Bankruptcy Code Sections 544(a), 548(a) and 550 and certain Minnesota state statutes.

The bankruptcy court first recognized that state law determines property rights in bankruptcy.  The bankruptcy court judge next recognized that Minnesota state law provided that one could not fraudulently transfer exempt homestead property, as creditors could not claim they were prejudiced by a transfer or claim that it was a fraud when there would be no recovery of value.  The bankruptcy court judge further held that that Minnesota protection extended to bankruptcy fraudulent transfers under 11 U.S.C. § 548 and denied the trustee’s avoidance actions.

On appeal, the bankruptcy appellate panel (“BAP”) held that the bankruptcy court judge erred by failing to analyze the alleged fraudulent transfer under Bankruptcy Code Section 548.  The BAP recognized two bases for the chapter 7 bankruptcy trustee’s avoidance powers:  (1) the avoidance powers of an unsecured creditor using state or federal law under Bankruptcy Code Section 544(b), and (2) the power to avoid a voluntary or involuntarily transfer within two years of filing found to be constructive fraud for lack of full, fair-market consideration while the Debtor was insolvent under Bankruptcy Code Section 548(a)(1)(B).  The BAP agreed with the chapter 7 trustee’s assertion that Minnesota law did not extend to avoidable fraudulent transfers in bankruptcy under 11 U.S.C. § 548.  The BAP recognized five elements to the trustee’s fraudulent conveyance avoidance powers under 11 U.S.C. § 548, and only the first one – the interest of the Debtor in property – depended upon an interpretation of state law.  The other four elements – (2) a voluntary or involuntary transfer, (3) within two years of filing bankruptcy, (4) for less than reasonably equivalent value, and (5) while the debtor was insolvent – all depended upon an interpretation of federal bankruptcy law.  The BAP ruled that the debtor, by entering into a settlement agreement and transferring the property, did have an interest in property under state law.  It also ruled that the transfer took place within two years of the wife filing her chapter 7 bankruptcy case.  As the other three elements were disputed, the BAP reversed and remanded the case for further findings by the bankruptcy court judge.

In reaching its decision, the BAP reasoned that the debtor could not claim the property as exempt because she voluntarily transferred the property before filing bankruptcy and her parents could not claim the exemption she might otherwise have.  By so doing, the BAP rejected the “no harm, no foul” rule that a minority of the courts have used to restrict the trustee’s avoidance power to those transfers involving nonexempt property.  The Fourth Circuit Court of Appeals, which includes the U.S. Bankruptcy Court for the Eastern District of Virginia, similarly rejected the “no harm, no foul” rule in a non-family law case in Tavenner v. Smoot, 257 F.3d 401 (4^th Cir., 2001).

You should consult with your Virginia bankruptcy and divorce lawyer, or Richmond divorce lawyer James H. Wilson, Jr., to discuss how you or your spouse’s your divorce transactions might affect a Virginia bankruptcy case.

How to file divorce in Virginia after one’s spouse files bankruptcy.

You may be able to file for divorce in Virginia after your spouse files bankruptcy, depending on the type and timing of the bankruptcy proceeding, but you should not attempt to divide your property or allocate your debts through the equitable distribution process or by a separation agreement or property settlement agreement without first obtaining relief from the automatic stay in a pending case such as a chapter 13 bankruptcy case.  The automatic stay that goes into effect as soon as a bankruptcy case is filed protects property of the bankruptcy estate and the debtor from collection efforts of his or her creditors holding prepetition claims.  Those creditors may include the spouse of the debtor.  A spouse may have a claim against a spouse in bankruptcy due to the existence of joint debts, a right to contribution, and rights incidental to the marital relationship, including a right to support and the rights to a division of marital property and allocation of marital debts through the equitable distribution under Virginia Code Section 20-107.3.

The automatic stay in bankruptcy found in Bankruptcy Code Section 362 does include exceptions for certain family law cases such as the establishment of paternity, the establishment or modification of  a domestic support obligation (as defined in 11 U.S.C. 101(14A), a proceeding to collect a domestic support obligation from property that is not property of the estate, a proceeding concerning child custody or visitation, a proceeding regarding domestic violence (such as a protective order), or a proceeding for divorce or the dissolution of the marriage provided the case does not seek a determination of the division of property that is property of the estate.  Nevertheless, settling one’s marital obligations with a separation agreement or property settlement agreement, or litigating the typical contested divorce case usually involves actions that could be considered a violation of the automatic stay.  Any action taken in violation of the automatic stay is void or of no effect.  Consequently, the prudent course of action is to first seek relief from the automatic stay in order to ensure that your separation agreement or property settlement agreement is valid or your equitable distribution award will not be disturbed.

While most chapter 7 cases are pending for only a short period of time, usually four to five months, a chapter 13 case may last three to five years.  Thus, while a spouse may choose to simply wait for the conclusion of a chapter 7 case (or 180 days if advisable under 11 U.S.C. 541(a)(5)(B)) before signing a separation agreement or proceeding with equitable distribution in Virginia, a spouse of a debtor in a chapter 13 case faces a potentially much greater delay. In addition, under Bankruptcy Code Section 1306, property of the estate in a chapter 13 case includes property that the debtor acquires and earnings from service performed during the case.   In all cases, the spouse of the debtor spouse should consult with a lawyer to protect that spouse’s rights in the bankruptcy case.

Relief from the automatic stay may be obtained in the U.S. Bankruptcy Court for the Eastern District of Virginia (EDVA) by filing a Motion for Relief from the Automatic Stay along with a Notice of Motion and Notice of Hearing.  The website for the EDVA has a court calendar for each of the two judges that lists regular hearing dates for Motions, including Motions for Relief from Stay.  The EDVA website also includes a number of bankruptcy forms for use in a Virginia bankruptcy, including a model Notice of Motion form.  After obtaining the appropriate hearing date, a movant would file the motion and notice, along with a proposed written order, and pay the filing fee to the clerk of court.  The motion, notice and proposed order should be mailed to the debtor spouse, the trustee appointed in the case, all creditors, and all parties in interest.

On the hearing date, the U.S. Bankruptcy Court for the Eastern District of Virginia will use a pre-call docket system in which all cases on the docket are first called by a clerk to determine if the matter requires a judicial determination.  Most cases are continued by agreement or resolved by agreement on the pre-call docket.  The few cases for the judge to hear, including your Motion for Relief from Stay, will be called in sequence after the judge takes the bench.  Usually, no one files an objection to the motion or shows up in opposition to the motion on the hearing date, which gives the non-filing spouse the opportunity to persuade the judge to grant his or her motion for relief unopposed.

After the judge grants relief from the automatic stay in court, the successful moving party must then submit a written order reflecting the judge’s decision for the judge’s signature (hopefully your proposed order).  With the issuance of the court’s written order, the non-filing spouse can then safely proceed with equitable distribution or the negotiation and execution of a separation agreement or property settlement agreement.  You may need to obtain the court’s approval of any separation agreement or property settlement agreement.  In addition, your attorney may need to obtain prior approval of employment of counsel before starting the process and approval of any fees paid, depending on the source of payment.

You should consult with your Virginia bankruptcy law and divorce law attorney or Richmond divorce lawyer James H. Wilson, Jr., to discuss whether you should seek relief from the automatic stay in your spouse’s bankruptcy case in order to execute a separation agreement or property settlement agreement or pursue equitable distribution in your Virginia divorce case.

What is the definition of “income” and what is the definition of “debt” in bankruptcy and divorce in Virginia?

Sometimes, the difference in the meaning of one word can determine the outcome of a case.  We often assume we know the meanings of some of the most frequently used words in bankruptcy and divorce, words like “income” and “debt”.  Yet, a closer examination of the legal definition of some of these frequently used words reveals how the legal definition may differ from the meaning of the word in common parlance.

Debt and income are important terms in bankruptcy and divorce in Virginia.  It is not surprising that we have more information on the meaning of income in divorce and on the meaning of debt in bankruptcy.  The legal definition of income in family law and divorce matters may affect child support, spousal support or maintenance, and the classification of marital property and separate property in equitable distribution in Virginia.  The legal definition of debt my affect the nature of a claim in bankruptcy and whether the claim represents an obligation owed or an interest in property.  In Virginia, it is not surprising that family law has stronger legal definitions of “income” and bankruptcy law has stronger legal definitions of “debt”, as divorce and family law are often concerned with establishing legal obligations based on income, while bankruptcy is concerned with the extinguishment of legal obligations based on debt.

We can first turn to Black’s Law Dictionary for common legal definitions of debt and income.  According to Black’s Law Dictionary, “debt” is “[a] fixed and certain obligation to pay money or some other valuable thing…, either in the present or future.”  Black’s Law Dictionary (Abridged 6^th Ed., 1991).  The legal definition of “income” is “the return in money from one’s business, labor, or capital invested; gains, profits, salary, wages, etc.” Black’s Law Dictionary (Abridged 6^th Ed., 1991).

The bankruptcy code leads us to a broad twofold definition of a “debt” in bankruptcy:  “The term “debt” means liability on a claim.”  11 U.S.C. § 101(12).  “The term “claim” means – (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; and (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured.”  11 U.S.C. § 101(5).   Thus, while a debt in common parlance usually means a present obligation on the part of the debtor and a present right to a certain amount of money on the part of the creditor, a debt in bankruptcy is not limited by time, conditions, or amount.  Of course, a debtor in bankruptcy may not discharge a debt that had not come into existence at the time of the filing of the bankruptcy case.

While the bankruptcy code does not define “income”, it does include a definition of “current monthly income” in 11 U.S.C. 101(10A) for means testing purposes under 11 U.S.C. 707(b)(2)(A)(i), as follows: “The term “current monthly income” – (A) means the average monthly income from all sources that the debtor receives (or in a joint case that the debtor and the debtor’s spouse receive) without regard to whether such income is taxable income…”  Thus income in bankruptcy may include nontaxable receipts, such as gifts or inheritances, which would not be considered income in the ordinary sense.

“Income” enjoys a broad and comprehensive definition in Section 20-108.2(C) of the Code of Virginia, where “gross income” means all income from all sources, and shall include, but not be limited to, income from salaries, wages, commissions, royalties, bonuses, dividends, severance pay, pensions, interest, trust income, annuities, capital gains, social security benefits except as listed below [not Federal supplemental security income benefits], unemployment insurance benefits, disability insurance benefits, veterans’ benefits, spousal support, rental income, gifts, prizes or awards.”    Excluded from “gross income” under the Virginia child support law definition are the following:  “1.  Benefits from public assistance and social services programs as defined in §63.2-100; 2.  Federal supplemental security income benefits; 3.  Child support received; or 4.  Income received by the payor from secondary employment income not previously included in “gross income” where the payor obtained the income to discharge a child support arrearage…”  Va. Code § 20-108.2(C)(1) – (3).

While Section 20-107.3 of the Code of Virginia, Virginia’s equitable distribution statute, provides definitions of “separate debt” and “marital debt”, “debt” itself is not defined.  “Debtor” is defined in Virginia’s Uniform Commercial Code (Va. Code § 8.9A-102(a)(28)), but not “debt”.  While Virginia has a Division of Debt Collection (Va. Code § 2.2-518), and a Virginia Debt Collection Act (Va. Code § 2.2-4800, et seq.), the legal definition of a “debt” remains elusive.  Virginia does define a “Debt Collector” in Virginia Code § 6.2-2000 with reference to the Federal Fair Debt Collection Practices Act, which does include a definition of debt as follows: “(5) The term “debt” means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.”  15 U.S.C. 1692(a)(5).   Finally,  the Virginia Taxes Title, Section 58.1-301 incorporates the definitions used in the Internal Revenue Service, which includes a definition of debt as follows:  “A debt is any amount owed to you, including stated principal, stated interest, fees, penalties, administrative costs, and fines. The amount of debt canceled may be all or only part of the total amount owed. However, for a lending transaction, you are required to report only the stated principal.”

You should consult with your Virginia bankruptcy and divorce attorney or Richmond Bankruptcy and Divorce Lawyer James H. Wilson, Jr., to discuss how the legal definitions of “debt” and “income” may affect your case.

Would an adult child’s obligation to support a parent be dischargeable in a Virginia bankruptcy?

Parents and spouses are not the only parties who may have a legal duty to support another person.  Adult children may have not only a moral obligation, but also a legal obligation to support their parents.  Many states, including Virginia, have enacted filial responsibility statutes that make adult children responsible for supporting their parents in certain instances.  While approximately thirty states have such filial responsibility statutes, very few of those states actually enforce the law so there is very little case law on the issue.  Neglect of Older Persons: An Introduction to Legal Issues Related to Caregiver Duty and Liability, by Lori Stiegel, Ellen Klem and Jenette Turner (American Bar Association on Law and Aging, 2007). 

 Virginia Code Section 20-88 provides that “[i]t shall be the joint and several duty of all persons eighteen years of age or over, of sufficient earning capacity or income, after reasonably providing for his or her own immediate family, to assist in providing for the support and maintenance of his or her mother or father, he or she being then and there in necessitous circumstances…”  The Virginia Juvenile and Domestic Relations District Court has exclusive original jurisdiction of all cases arising under Virginia Code Section 20-88, presumably because the judges of that court have jurisdiction over family law matters (other than divorce) and extensive experience in understanding family finances, income, expenses and support.  In Virginia, “necessitous” is defined as “living in or characterized by poverty; needy,” and as “narrow, destitute, pinching, pinched.”  Mitchell-Powers Hdwe. Co. v. Eaton, 171 Va. 255, 198 S.E. 496 (1938).

The adult child is only responsible for his or her parent after reasonably providing for his own family.  Bagwell v. Doyle, 187 Va. 844, 48 S.E.2d 229 (1948).   Although the triggering condition required is “necessitous circumstances”, the level of support required of the adult children is actually closer to that of permanent spousal support (which recognizes a right to continue the standard of living established during the marriage) consisting of “…such support and maintenance as comport with the health, comfort and welfare of normal individuals according to their standards of living considering his or her own means, earning capacity and station in life…”  Mitchell-Powers at 262 (1938).  This compares with a spouse’s contract or tort liability to a third party for a spouse’s necessaries codified in Virginia Code Section 55-37 and for emergency medical treatment of a spouse codified in Virginia Code Section 8.01-220.2, in addition to possible criminal prosecution for desertion or nonsupport of a spouse or child under Virginia Code Section 20-61.

There are two exclusions to the statutory duty to support one’s parent: (1) the desertion, neglect, abuse or willful failure to support the child by the parent; and (2) the receipt by the parent of public assistance or services under a federal or state program, with the exception that the Commonwealth of Virginia or one of its departments, including the Department of Medical Assistance Services or the Behavioral Health and Developmental Services, might seek reimbursement for a portion of the costs of such assistance or services from the adult children in the place of the necessitous parent.  Va. Code §20-88 .  The reason for the dearth of cases involving filial responsibilities statutes is probably this second exclusion.  Many elderly people in Virginia who might otherwise be in necessitous circumstances are taken care of in nursing homes under Medicaid coverage.   In Virginia, the Department of Medical Assistance Services administers the Medicaid program through the localities, which helps pay for nursing home care not otherwise eligible for Medicare coverage, for persons 65 years and older, who have limited income and resources.

Would such a filial support obligation to the parent or the Commonwealth of Virginia be dischargeable in bankruptcy by the adult child?  Bankruptcy Code Section 523(a)(5) creates an exception to discharge for a domestic support obligation.  “Domestic Support Obligation” is defined in Bankruptcy Code Section 101(14A) as follows:

“(14A) The term “domestic support obligation” means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is—

(A) owed to or recoverable by—

(i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or

(ii) a governmental unit;

(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;

(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of—

(i) a separation agreement, divorce decree, or property settlement agreement;

(ii) an order of a court of record; or

(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and

(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.”

In order to be considered a Domestic Support Obligation not dischargeable in bankruptcy, the support obligation must meet the four requirements found in (A), (B), (C), and (D) above.  A filial support obligation may meet the first and fourth elements of a Domestic Support Obligation in that it is “(A) owed to or recoverable by…(ii) a governmental unit, and is “(D) not assigned to a nongovernmental entity…” , but it would fail to meet the second element in that it is not support to a “spouse, former spouse, or child of the debtor or such child’s parent…” and it may not meet the third element because if the obligation was established in the Juvenile and Domestic Relations District Court, because that court is not “(C)(ii)…a court of record;”, although the argument could be made that the third element is satisfied because the Debtor’s filial support obligation is  “(C)…subject to establishment…by reason of applicable provisions of – …(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit…”

Although it appears that a filial support obligation would be a dischargeable debt in bankruptcy, you should first consult with your Virginia bankruptcy and family law lawyer, or Richmond bankruptcy and family law lawyer James H. Wilson, Jr., to discuss whether your particular family law obligation may be dischargeable in bankruptcy.

Can a chapter 7 bankruptcy trustee sell the debtor’s right to a portion of her former spouse’s 401(k) plan?

Not in the case of In re Carlton, Case No: 300-40223, an unpublished case from U.S. Bankruptcy Court for the District of Oregon, where the judge held that the Debtor has no claim against her former husband, but instead has a right in his 401(k) plan and a right to obtain a Qualified Domestic Relations Order (“QDRO”).

In Carlton, the Debtor wife was divorced from her husband before filing chapter 7 bankruptcy.  In the divorce decree, the state court judge awarded the Debtor wife fifty percent (50%) of her husband’s 401 (k) plan and an equalizing judgment for a sum to compensate her for her share of the husband’s IRAs that he would retain.  The state divorce court retained jurisdiction to enter a QDROs transferring wife’s share of her husband’s retirement plan.  The wife did not obtain a QDRO before filing for chapter 7 bankruptcy to discharge her debts.  In her bankruptcy filing, the wife listed her interest in the 401(k) plan as a contingent, unliquidated claim against her ex-husband on her schedule B of personal property, but did not list it as exempt on her schedule C of exempt property. The chapter 7 trustee appointed in the Debtor’s bankruptcy case negotiated with the Debtor’s ex-husband to sell her interest in his 401(k) plan back to him for the sum of $5,000.  The Debtor wife objected to the trustee’s notice of intent to sell filed in the case to obtain the bankruptcy court judge’s approval of the sale.

The chapter 7 trustee in Carlton argued that the Debtor wife had no interest in her husband’s retirement plan until she obtained a QDRO, but instead had a claim against her ex-husband.  The Debtor wife argued that the divorce decree created an interest in her former husband’s 401(k) plan, which interest was not property of the estate due to the anti-alienation provisions of the Employee Retirement Income Security Act (“ERISA”), 29 U.S. Code Section 1056(d)(1).   ERISA is a federal law that regulates the creation of pension and retirement plans for employees and their beneficiaries, including spouses and children.  In general, interests in an ERISA plan may not be alienated, sold or transferred. This restriction on the alienation of ERISA benefits ensures that these plans are created exclusively to provide retirement benefits to participating employees and their beneficiaries.  Boggs v. Boggs, 520 U.S. 833, 845 (1997) .  One exception to this general rule against alienation was created for former spouses, who can obtain an interest in their spouse’s retirement plan from a divorce by a special order known as a Qualified Domestic Relations Order or QDRO,  29 U.S. Code Section 1056(d)(3)  .  (Spouses may also use a regular Domestic Relations Order in a divorce case to preserve the tax treatment of a transfer of a non-ERISA retirement plan, such as an Individual Retirement Plan or IRA.)

The bankruptcy court judge recognized that the state divorce decree awarding an interest in the husband’s 401(k) plan created the wife’s interest in the plan and limited the husband’s interest in the whole plan, citing Trustees of the Directors Guild of America-Producer Pension Benefits

Plans v. Tise, 234 F.3d 415 (9th Cir. 2000).   Instead of having a claim against her husband, the Debtor had a claim against the 401(k) plan.  The divorce decree gave the wife a right to obtain a QDRO in order to enforce her claim.  The bankruptcy judge ruled that the right was personal to the Debtor wife and could not be exercised by a chapter 7 trustee, who was not within the definition of alternate payee under ERISA, limited to a spouse, former spouse, child or other dependent of the employee participant.  29 U.S.C. 1056(d)(3)(K).  Since the chapter 7 trustee could not obtain a QDRO, he could not sell the interest in the retirement plan.

If you have any questions about a chapter 7 bankruptcy trustee’s rights in your or your former spouse’s retirement plan, call your Virginia bankruptcy and divorce law lawyer or Richmond Bankruptcy and Divorce Lawyer James H. Wilson, Jr.

Does Virginia’s heart balm statute prohibit an action to recover an engagement ring?

Not in the case of McGrath v. Dockendorf, 793 S.E.2d 336 (2016), where the Supreme Court of Virginia ruled that a detinue action to recover a two carat diamond engagement ring worth $26,000 was not barred by Virginia’s heart balm statute, Virginia Code Section 8.01-220.  While the case does not directly concern bankruptcy, it does address property rights upon engagement.

Ethan L. Dockendorf gave a two carat engagement ring worth $26,000 to Julia V. McGrath with his promise to marry her.  After an engagement of more than a year, Dockendorf called off the marriage and demanded the return of the engagement ring from McGrath.  Dockendorf sued McGrath in detinue under Virginia Code Section 8.01-114 in the Circuit Court of Fairfax County for the return of the ring or its value.  A detinue action is an action recognized in Virginia for the return of property unlawfully withheld from the plaintiff.  The Circuit Court ruled in Dockendorf’s favor on the theory that the engagement ring was a conditional gift.  McGrath was ordered to return the ring within 30 days or suffer a money judgment for $26,000.

McGrath appealed to the Supreme Court of Virginia, arguing that Virginia’s heart balm statute barred a recovery for an engagement ring.  At one time, a fiancé could sue his or her betrothed for improperly breaking a promise to marry, Grubb v. Suit, 32 Gratt. 203 (1879), and recover financial and emotional damages.  In 1968, Virginia enacted a heart balm statute, Section 8.01-220, abolishing actions for a wrongful breach of a promise to marry.  In addition, Virginia has recognized a right to recover an engagement ring, Pretlow v. Pretlow, 177 Va. 524, 14 S.E.2d 381 (1941), the subject of another blawg post here, if the donee terminates the engagement.  McGrath argued that an action for a return of the engagement ring is essentially an action for a breach of a promise to marry, the type of action abolished by Virginia’s heart balm statute.  In response, Dockendorf argued that the heart balm statute is limited to a nullification of the common-law action for breach of promise to marry and not for the return of the gift of a ring.

The Supreme Court of Virginia first recognized the standard of review, which was one of de novo statutory construction.  The court then distinguished an action in detinue for the return of specific personal property from an action for a breach of a promise to marry for the recovery of damages for the humiliation and loss of a broken engagement.  The court noted that a majority of other state courts have ruled that a heart balm statute does not prohibit an action for the return of an engagement ring. Finally, the court affirmed its assumption that the General Assembly of Virginia is aware of the court’s rulings when enacting legislation, and did not specifically abolish an action for the return of an engagement ring when enacting Virginia’s heart balm statute.

The Supreme Court of Virginia distinguished its decision in McDermott v. Reynolds, 260 Va. 98, 530 S.E.2d 902 (2000) on which McGrath relied, a civil action for alienation of affections barred by Virginia Code §8.01-220 as the same type of action for damages for a particular type of conduct, disguised an intentional infliction of emotional distress.  In an interested footnote #3, the court noted “The question of fault may (or may not) bear upon the viability of a detinue action, but it is not relevant to our construction of the heart balm statute”  Apparently, the fault of Dockendorf in breaking off the engagement was not an issue raised at trial or on appeal, which issue might have obtained a different outcome for McGrath.

You should discuss with your Virginia divorce lawyer, or Glen Allen divorce lawyer James H. Wilson, Jr., whether you may be entitled to the return of, or to retain, an engagement ring.