Is a wife’s claim for equitable distribution in divorce a debt discharged in bankruptcy or an interest in property (part 2 of 2)?

Is a wife’s claim for equitable distribution in divorce a debt discharged in bankruptcy or an interest in property (part 2 of 2)?

As discussed in the first part of the answer to this question, there have been different approaches in the U.S. Bankruptcy Courts to the treatment of a spouse’s claim for equitable distribution in a bankruptcy case.  Part 1 included a discussion of In re: Scholl, 234 B.R. 636 (Bankr. E.D. Pa., 1999), and In re: Roberge, 188 B.R. 366 (Bankr. E.D. Va., 1995), which recognized that a spouse’s equitable distribution rights are not a claim discharged in bankruptcy, but rather vested property rights not affected by the spouse’s bankruptcy filing, except for the need to seek relief from the automatic stay to determine those rights in state court.

A contrary result was reached In re: Schorr, 299 B.R. 97 (W.D. Pa. 1993), where the U.S. Bankruptcy Court held that a wife’s equitable distribution rights were a claim or a debt discharged in her husband’s bankruptcy case.  In Schorr, the husband filed for a divorce from his wife in state court.  The wife filed an answer requesting equitable distribution and a counterclaim for her own relief.  The husband filed a chapter 7 bankruptcy case before any order had been entered in the state divorce proceeding.  The wife did not file an objection to husband’s claimed exemptions within the 30 days following the conclusion of the meeting of creditors, the deadline set by Bankruptcy Rule 4002(b)(1), http://www.law.cornell.edu/rules/frbp/rules.htm#Rule4003 .  The wife did not file a motion for relief from the automatic stay under 11 U.S.C. 362(d), to continue her request for equitable distribution in the state court divorce case or file an adversary proceeding objecting to the dischargeability of her claim under 11 U.S.C. 523(15). [Although neither of these actions are normally necessary to preserve one’s rights to later pursue a domestic support obligation or other family law debt, sometimes it is preferable.]  The chapter 7 trustee found no non-exempt assets to administer in husband’s bankruptcy and filed a no asset report.

After the husband’s bankruptcy case was concluded and closed, the wife continued her divorce and equitable distribution proceedings in state court.  The husband asserted his discharge in bankruptcy as a defense in state court to wife’s demand for equitable distribution.  The state court judge required the husband to reopen his bankruptcy case for a decision on this crucial issue.  Consequently, the husband filed an adversary proceeding in bankruptcy court for a determination of the dischargeability of wife’s claim for equitable distribution.  The wife denied that her request for equitable distribution was a claim or debt that could be discharged in bankruptcy, relying on the Scholl case discussed in Part 1.

The Schorr court first recognized the danger of collusion when an estranged spouse files bankruptcy – that the debtor spouse may transfer all his or her assets to his or her spouse in the divorce proceeding to gain a divorce rather than lose those assets to the creditors in bankruptcy.  The court then distinguished the Schorr case from the Scholl case.  In contrast to the Schorr case, the non-debtor spouse in Scholl sought relief from the automatic stay to pursue equitable distribution and filed an adversary proceeding against the debtor spouse for a determination that she did not have a claim and that there was no debt to her to be discharged.  The judge in Schorr disagreed, however, with the Scholl court’s holding that, in the absence of a separation agreement or a court order, the non-debtor spouse did not have a claim or debt that would be discharged in bankruptcy.  The Schorr  judge ruled that the wife’s request for equitable distribution was a cause of action and a pre-petition “claim”.  The court noted that the definition of a “claim” in 11 U.S.C. 101(5A) did not require a contract or court order, but simply a right to payment.

The court next recognized the public policy argument against the Scholl holding: that the division of marital property in state court would thereby be allowed to take place without any consideration of the effects of such distribution on the creditors.  The judge in Schorr further disagreed with the bankruptcy court judge’s application of the in custodia legis doctrine to marital property in divorce proceedings without the authority of a decision of the highest appellate court of the state.  The Schorr court also disagreed with the impossibility of applying the balancing test required under [the previous version of] 11 U.S.C. 523(a)(15) to determine if a family law debt should be discharged without a prior equitable distribution order, finding it possible if the non-debtor spouse filed an adversary proceeding and re-opened the bankruptcy case after conclusion of the state court equitable distribution.  The court concluded by ruling that the wife had an unliquidated, disputed, unsecured claim that was discharged in her husband’s bankruptcy case.

You should consult with your Virginia bankruptcy or divorce lawyer concerning whether your equitable distribution rights can be discharged in bankruptcy.

Is a wife’s claim for equitable distribution in divorce a debt discharged in bankruptcy or an interest in property (part 1 of 2)?

Is a wife’s claim for equitable distribution in divorce a debt discharged in bankruptcy or an interest in property (part 1 of 2)?

There appears to be a split of authority across the U.S. on the treatment of a spouse’s claim for equitable distribution in a bankruptcy case.  Pennsylvania, like Virginia, is a marital property state that provides for equitable distribution in divorce cases.  Although the amendments to the Bankruptcy Code in October 2005 with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) has altered the treatment of family law debts in bankruptcy by defining Domestic Support Obligations in Section 101(14A), and revising two categories of exceptions to discharge of divorce debts in 523(a)(5) and (15), understanding these two approaches may prove useful to litigating divorce matters in the Virginia county circuit courts or the U.S. bankruptcy courts in Virginia.  The Third Circuit Court of Appeals declined to decide this split of opinion in the unpublished case of Fox v. Fox, Case No: 06-4075 (3rd Cir. 2007).  The two leading bankruptcy cases cited in that federal circuit illustrating the two different approaches are In re: Schorr, 299 B.R. 97 (Bankr. W.D. Pa., 2003), and In re: Scholl, 234 B.R. 636 (Bankr. E.D. Pa., 1999).

In the Scholl case, the wife filed for divorce in state court, asking for equitable distribution, pendente lite spousal support, attorney’s fees and costs.  The property subject to equitable distribution included the marital residence, husband’s pension and husband’s Individual Retirement Account (IRA).  The husband filed a chapter 7 case in the federal bankruptcy court in the Eastern District in state.  The husband listed wife as an unsecured creditor in his bankruptcy case with a possible debt from marriage not to include alimony or spousal support.  Pensions and retirement accounts are usually exempt from creditor process, and thereby protected in bankruptcy from administration by the chapter 7 trustee.   The wife filed an adversary proceeding in the husband’s bankruptcy case for a judicial determination that her right to equitable distribution was not dischargeable in husband’s chapter 7 case.  The wife also sought, and was granted, relief from the automatic stay to continue the divorce case in state court.  In her adversary proceeding, the wife contended that she had vested property rights in the state court equitable distribution procedure that were not discharged by the husband’s bankruptcy.  In defense, the husband contended that the wife had a contingent, unliquidated, disputed claim comparable to a tort claim that could be discharged in bankruptcy.  The bankruptcy court judge recognized that marital property subject to equitable distribution is placed under the divorce court’s jurisdiction, held in custodia legis  (“in the custody of the law”) until the conclusion of the state divorce case.  While the definition of a claim in bankruptcy is broad under Section 101 (5)(A), it does not encompass rights that do not include enforceable obligations.  The filing of a divorce action itself does not give rise to a right to payment, so there is no claim to discharge in the subsequent bankruptcy filing.  In resolving the matter, the bankruptcy court judge looked to state law to determine whether the wife had a right to payment or “claim” at the time the bankruptcy case was filed.  In this case, there was no equitable distribution order or separation agreement supporting a right to payment under state law.  Consequently, the judge held that the wife would take her interests in the marital property free of the creditors of husband’s bankruptcy estate, and husband’s interests in the marital property were property of the bankruptcy estate subject to administration unless exempted.

In a supporting footnote, the judge in the Scholl case cited the case of In re: Roberge, 188 B.R. 366 (Bankr. E.D. Va., 1995), an appeal from the U.S.  Bankruptcy Court for the Eastern District of Virginia, Richmond Division.  In the Roberge case, the bankruptcy judge denied the wife’s motion for relief from the automatic stay in her husband’s chapter 7 case in order to allow her to prosecute an equitable distribution in a Florida.  The husband had left the marital residence to move to Virginia, where he obtained an ex parte divorce from the wife, then filed a chapter 7 bankruptcy two months later.  As the Virginia court never had personal jurisdiction over the wife and could not therefore affect her property rights, the wife was able to file an equitable distribution suit in Florida.  The chapter 7 bankruptcy trustee opposed wife’s motion in the bankruptcy court for relief from the stay to pursue her Florida equitable distribution case.  On appeal, the U.S. District Court for the Eastern District of Virginia first recognized that the Florida case was stayed by the husband’s bankruptcy filing.  The court then recognized that the stay may be lifted for cause under 11 U.S.C. 362, and that the grant of jurisdiction over bankruptcy matters to the district court allowed the district court to abstain from deciding state law matters in the interest of justice or in the interest of comity or respect for state law under 28 U.S.C. 1334(c)(1).

The wife argued in Roberge that domestic relations law is essentially state law best left to the state courts to decide.  The bankruptcy trustee argued that the wife’s equitable distribution rights, an unsecured claim in bankruptcy, were cut off by husband’s bankruptcy filing, based on the trustee’s superior avoidance powers as a hypothetical judgment lien creditor under 11 U.S.C. 544.  The trustee’s argument depended upon state law that recognized equitable distribution rights as being subject to a prior perfected lien.

The judge disagreed with the trustee’s argument in Roberge, holding that the mere filing of a bankruptcy petition does not divest otherwise vested equitable distribution rights.  The judge recognized that property rights are created and defined by state law and that bankruptcy law generally does not act as substantive law.  While bankruptcy should not be used as a weapon in divorce proceeding, the court was mindful of the possibility of collusion by the spouses to cut off creditors’ rights, so relief from the automatic stay is properly a matter of the discretion of the bankruptcy court judge.  The court noted that the bankruptcy court’s decision would contradict the state’s public policy of fostering marriage, by allowing a spouse to abandon his spouse by obtaining an ex parte divorce and cutting off her equitable distribution rights.  Relief from the stay should have been granted in this case, according to the three part test of the Fourth Circuit Court of Appeals in In re: Robbins, 964 F.2d 342 (4th Cir., 1992), because domestic law matters are best left to the states to decide, modifying the stay promotes judicial economy, and the creditors would not be prejudiced by allowing equitable distribution to proceed.  The bankruptcy court judge’s decision was reversed on appeal and the case was remanded back to bankruptcy court.

You should consult with your Virginia bankruptcy or divorce lawyer concerning whether your equitable distribution rights can be discharged in bankruptcy.  The answer to this question is completed in Part 2, where a contrary result in the Schorr case is discussed.

Must a chapter 13 bankruptcy debtor pay a child support arrearage in full for confirmation of the plan 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), and In re: Sosa, Case No. 09-13389-SSM, (Bankr., E.D. Va, January 21, 2010).  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.

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), even when the domestic support obligation is owed to a governmental unit, 11 U.S.C. 101(14A), 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.  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, 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).  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), 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, under the case of Deans v. O’Donnell, 692 F.2d 968 (4th  Cir. 1982).  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?

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, 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.  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 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), 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.

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.

Where can a husband or wife file a divorce case?

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.  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.  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, giving rise to the concept of divisible divorce.  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.  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…”.  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?

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.

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.  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.  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), 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.

What are eligibility requirements for filing chapter 13 bankruptcy for a husband or wife in Virginia?

What are eligibility requirements for filing chapter 13 bankruptcy for a husband or wife in Virginia?

A husband or wife in Virginia must meet certain requirements in order to be eligible for chapter 13 relief.  These requirements are set forth in Section 109 of the Bankruptcy Code, Title 11 of the U.S. Code.  First, Chapter 13 relief is limited to individuals, it is not available to corporations, partnerships or limited liability companies.  Only an individual or an individual and his or her spouse can file for chapter 13 relief.

Second, the individual must have regular income.  At one time, chapter 13 relief was limited to wage-earners, now chapter 13 relief is available to individuals with income from one of a variety of sources, including social security, self-employment, or a pension.  In re: Estus, 695 F.2d 311 (8th Cir., 1982).

Third, there are limitations on the amount of debt that an individual can have to qualify for chapter 13 relief.  The debt limitations can change every three years on April 1st, starting on April 1, 1998, under Bankruptcy Code Section 104.  As of the date this was posted, the debt limitations for chapter 13 relief are $383,175 in noncontingent, liquidated, unsecured debts and $1,149,525 in noncontingent, liquidated, secured debts.   Periodic adjustments to values, or the calculations for such periodic adjustments, are shown in the Federal Register and on the Eastern District of Virginia, Richmond Division website.

With certain exceptions, just as for chapter 7 relief, the individual must complete credit counseling prior to filing bankruptcy.  A person who has voluntarily dismissed a prior chapter 13 case following the filing of a Motion for Relief from the Automatic Stay may not be eligible for 180 days, although this requirement has been interpreted in several different ways, including as a temporal requirement or equitably, focusing on the use of the word “following” instead of “after”.  In re: Sole, 233 B.R. 347 (E.D. Va. Bkr., 1998).  A debtor may also be barred from refiling by a prior court order from the Bankruptcy Court for certain cause, including a prior abuse of the process or bad faith in a prior case.

You should consult with your Virginia bankruptcy lawyer concerning your eligibility for chapter 13 relief.

Which courts hear bankruptcy and family law matters in Virginia?

Which courts hear bankruptcy and family law matters in Virginia?

Virginia lawyers and judges use the term jurisdiction to describe the power of a court to hear and decide a particular matter concerning a particular person or thing.  Venue is used to describe the most appropriate or convenient court in Virginia to hear a particular matter, usually from a number of different possible courts with jurisdiction.  In the Richmond, Virginia area, the U.S. Bankruptcy Court for the Eastern District of Virginia, Richmond Division, has jurisdiction and venue over bankruptcy cases when the debtor’s domicile, residence, principal place of business or principal principal assets were located, for the greater portion of the preceding 180 days in cities of Richmond, Colonial Heights, Emporia, Fredericksburg, Hopewell, or Petersburg, or the counties of Amelia, Brunswick, Caroline, Charles City, Chesterfield, Dinwiddie, Essex, Goochland, Greensville, Hanover, Henrico, King and Queen, King George, King William, Lancaster, Lunenburg, Mecklenburg, Middlesex, New Kent, Northumberland, Nottoway, Powhatan, Prince Edward, Prince George, Richmond County, Spotsylvania, Surry, Sussex or Westmoreland.

Bankruptcy concerns both federal and state law while family law is predominantly state law.  Congress was given the power to establish “uniform Laws on the subject of Bankruptcies throughout the United States;..” in Article I, Section 8 [4] of the U.S. Constitution.  In Section 151 of Title 28 of the U.S. Code, bankruptcy courts and judges are made a part of the U.S. District Court system.  The Bankruptcy Code is contained in Title 11 of the U.S. Code.  The power of the Bankruptcy Courts is defined in Section 105 of Title 11, which include the broad-reaching, equitable power to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [Title 11 of the U.S. Code]”.  By virtue of a standing order entered in the U.S. District Court for the Eastern District of Virginia, bankruptcy related matters have been referred to the bankruptcy judges in this district.   As discussed in answer to the question, “What kind of property can a husband or wife protect in bankruptcy?”, Virginia has “opted out” of the property protections or exemptions provided in the Bankruptcy Code, so Virginia residents use the Virginia state law exemptions, along with various non-Bankruptcy Code federal exemptions, to protect property in bankruptcy.  Thus, bankruptcies in Virginia are concerned with Virginia property law, and Virginia divorce or family law.

The Virginia Circuit Courts have exclusive, original jurisdiction over divorces and related matters, including spousal support and maintenance, child support, child custody, child visitation, and equitable distribution, the process of dividing up marital property and marital debt.  Most of the Virginia statutes concerning domestic relations, marriage and divorce are contained in Title 20 of the Virginia Code.  The Virginia Juvenile and Domestic Relations District Courts share jurisdiction with the Circuit Courts over certain family law matters, including child custody, child visitation, child support, spousal support or maintenance, as defined in Section 241 of Title 16.1 of the Code of Virginia, but not over divorce or equitable distribution.

You should consult with a Virginia bankruptcy or family law lawyer to discuss which court is the proper court to hear your legal matter.

Will a court reduce husband’s spousal support due to changes in the economy and the real estate market?

Will a court reduce husband’s spousal support due to changes in the economy and the real estate market?

In an unpublished opinion, the Virginia Court of Appeals upheld the Circuit Court’s denial of a reduction in the case of Lane v. Lane, Record No. 0951-09-4 (September 15, 2009)  . The husband and wife were married for twenty-four years before separating. At the time the parties entered into a separation agreement, husband was a CEO of a company and made more than half a million a year in salary.  In the separation agreement, the husband agreed to pay to wife $6,000 a month in spousal support with the following condition:

“[Wife] agrees to make a good faith effort to obtain a job so that she may become more financially self-sufficient. If [husband]’s income is reduced substantially through no voluntary act on his part, the amount of spousal support to be paid shall be subject to renegotiation and modification within six weeks of such a reduction. If [husband] and [wife] are unable to agree as to the amount of support to be paid, then they agree to return to mediation in an attempt to resolve these issues before taking any legal action.”

The separation agreement was incorporated into the final decree of divorce.  Three years after the date of the property settlement agreement, husband’s company was bought by another company.  The husband began investing in real estate projects and the stock market.  With the onset of the recession in 2007 and 2008, husband experienced a substantial reduction in his income.

After the divorce, the wife became a real estate agent in an attempt to become self-sufficient.  After she was diagnosed with cancer four years later, wife exited the real estate business.

The husband made a motion to reduce his spousal support obligation in the Virginia Circuit Court.  The divorce court judge found the necessary material change in circumstances to modify support, but held that the involuntary change in husband’s income did not warrant a reduction in spousal support.   The trial court also held that wife had made a good faith effort to obtain employment and income.  The husband appealed the judge’s denial of his motion to reduce spousal support.

The Virginia Court of Appeals first restated its standard of review, that it would not disturb a trial court’s decision where it is based on an ore tenus hearing, unless it is ‘plainly wrong or without evidence in the record to support it.  Citing Virginia Code Section 20-109(C), the court recognized that it’s authority was limited by the stipulation or contract between the parties. In this case, the separation agreement provided for a reduction in support when husband’s income decreased through no fault of his own.  A party moving for a reduction in spousal support must prove both a material change in circumstances and that the change justifies a reduction in support.  The material change must relate to the ability of the spouse paying support to pay or the needs of the spouse receiving support.  Here, although the husband had prudently decided to invest in the stock market and was not required to use his investments for support, the husband was in good health, had better earning capacity than wife, and had enjoyed a higher standard of living than during the marriage.  The divorce court judge found that wife had a greater need for support due to her health and the husband was not less able to provide support to her.  Consequently, although there had been a material change in circumstances, that change did not justify a modification of support.  The trial court’s ruling that wife had made a good faith effort to secure employment was supported by the evidence.  The Virginia Court of Appeals recognized that the trial court judge, as fact finder, properly ascertained wife’s credibility, determined the weight to be given to her testimony, and had the discretion to accept or reject any of the wife’s testimony.  The court declined to award either appellant or appellee attorney’s fees and costs.

You should consult with your divorce lawyer to discuss whether the consequences of the current recession justify a modification of a support obligation in your case.

How should an income tax refund from a joint tax return be divided between a husband and wife in a Virginia bankruptcy case?

How should an income tax refund from a joint tax return be divided between a husband and wife in a Virginia bankruptcy case?

In the case of In re: Lyall, 191 B.R. 78 (E.D. Va., 1996), the U.S. District Court for the Eastern District of Virginia ruled that the tax refund had to be divided in proportion to each spouse’s withholding rather than divided equally or divided in proportion to each spouse’s percentage of the total income.  The husband had filed a chapter 7 bankruptcy case in the Eastern District of Virginia Bankruptcy Court without his wife.  In the bankruptcy case, the Debtor husband listed on his Schedule B, as part of the property of the estate under Section 541 of Title 11, the Bankruptcy Code, a tax refund, which the husband claimed as exempt on Schedule C under the Virginia Homestead Exemption found in Section 34-4 of the Code of Virginia.   A creditor objected the husband’s claimed exemption of the tax refund.  Although most of the couple’s income had been derived from the husband’s withholdings, the bankruptcy court judge ruled that the husband and wife were each entitled to 50% of the tax refund, based on the case of Bass v. Hall, 79 B.R. 653 (Bankr., W.D. Va., 1987).

On appeal, the United States District Court for the Eastern District of Virginia disagreed.  The court recognized that there were three positions across the county: a majority position which held that the tax refund should be allocated proportionally according to each spouse withholding in the relevant year, a position that the tax refund should be allocated equally without regard to income or withholding, and a position that the refund should be allocated in proportion to each spouse’s income produced.  The court agreed with the majority position on the grounds that the income withheld would have been the husband’s property if the withholding amount were correct, and the husband could not have transferred that amount of income to the wife before filing because that transfer could be set aside as a fraudulent transfer.  The court recognized the well-established law that the filing of a tax return does not alter the property rights between the spouses, citing In re: Wetteroff, 453 F.2d 554 (8th Cir, 1972) .

You should consult with your Virginia bankruptcy lawyer concerning your property rights in a tax refund from a joint tax return with your husband or wife.