Year: 2015

What is the difference between a liquidation and a plan bankruptcy on a Virginia separation or divorce?

There are two different types of bankruptcies, a liquidation and a plan bankruptcy.   Each will have different effects on your divorce proceeding.  A liquidation, represented by Chapter 7 of the Bankruptcy Code, means that the filing husband or wife has agreed to give up his or her non-exempt property to be liquidated by a trustee.  Certain property can be protected from creditors by the husband or wife, or both, under federal and state laws.  The protected property is exempt from creditor process and would also be protected from liquidation by the trustee.  The Chapter 7 trustee has the power and obligation to administer or sell the non-exempt property and pay the creditors from the proceeds of sale.  A trustee can sell jointly owned property and pay the co-owner for his or her interest in the jointly owned property.  As answered in the question, “Is my Virginia real estate vulnerable to creditors when I divorce?”, property held by the spouses in a tenancy by the entirety will be exempt while the husband and wife are married provided there are no joint creditors.

The Chapter 7 liquidation will usually last only about four months and the case filing will not delay the granting of a divorce or the determination or collection of support obligations.  While the equitable distribution portion of the divorce must wait until after the discharge is granted or the case is closed, a spouse could seek relief from the automatic stay to proceed sooner than the time it takes to administer the bankruptcy estate.  Domestic support obligations and debts related to separation and divorce will not be discharged in the Chapter 7 case.

A plan bankruptcy means that the filing husband or wife has agreed to repay part or all of his or her debt through a plan confirmed by the U.S. Bankruptcy Court judge.  Chapter 13 is the most frequently filed type of plan bankruptcy.  Chapter 11 is a reorganization for businesses or individuals, and Chapter 12 is a plan bankruptcy tailored for family farmers or family fisherman.  In Chapter 13 bankruptcy, a husband or wife will repay debts over a three to five year period.  The spouse filing bankruptcy can keep his or her property, exempt or not, but must pay the creditors at least as much as they would receive if the husband or wife filed Chapter 7 bankruptcy.  This requirement is known as the liquidation test or the best interests of the creditors test:  the creditors will not be any worse off because the debtor chose to file a plan bankruptcy instead of a liquidation.

A Chapter 13 case has the potential to have much greater effect on a Virginia divorce than a Chapter 7 case.  The Chapter 13 case may last up to five years and a spouse may want to seek relief from the automatic stay to continue the equitable distribution portion of the Virginia divorce.  Actions taken in violation of the automatic stay will be void.  Domestic support obligations are priority claims that must be paid in full in the Chapter 13 plan.  In addition, in order to have a plan confirmed, the debtor must certify that all domestic support obligations coming due after the case was filed are current.  Similarly, at the conclusion of the Chapter 13 plan, the debtor must certify that domestic support obligations have been satisfied in order to obtain a Chapter 13 discharge.  The Chapter 13 discharge is broader than the Chapter 7 discharge, and can discharge debts to the non-filing husband or wife related to separation and divorce that are not domestic support obligations.

You should consult with your Virginia bankruptcy or divorce lawyer to discuss the different impact of a liquidation or plan bankruptcy on your separation or divorce.

Would a Virginia divorce court order a couple to allow the former marital residence to go to foreclosure?

A Loudoun County Circuit Court judge would not allow such an order.  In the case of Reidy v. Reidy, Civil Action No: 51821, a Virginia divorce court judge was confronted with evidence that the former marital residence had declined in value to a point that the two mortgages against the property exceeded its market value.  Neither husband nor wife was able to afford the payments on the marital real property.

Under Virginia’s equitable distribution statute, Virginia Code Section 20-107.3, a Circuit Court judge can allocate assets, allocate debts, and make a monetary award in favor of the husband or wife.  In this case, the judge recognized that he could not order a public or private sale of the former marital residence because the husband and wife would not be able to pay the amounts necessary at settlement to pay off the liens against the property.  The divorce court could not order a short sale because the court had no control over the mortgage company.  The divorce judge refused to order the husband and wife to allow the property to go into foreclosure because there was no authority for such an order under the Virginia equitable distribution statute and because it would be “completely abhorrent to the whole equitable distribution scheme for a court to order a party not to pay a debt.”  The court essentially left the parties where they were, declining to allocate assets or debts or to make a monetary award in favor of husband or wife.

You should consult with your bankruptcy or divorce lawyer to discuss your options with respect to a mortgage default or foreclosure sale when you are separated or divorced.

What happens to marital property in a Virginia bankruptcy?

A husband or wife’s interest in assets or property may be viewed differently for purposes of bankruptcy administration and equitable distribution in a divorce case.  When a bankruptcy case is filed, an estate is created.  The bankruptcy estate consists of each and every interest or right that that debtor may have in any kind of property, including tangible property like vehicles, real estate and furniture, and intangible property like a bank account, the right to a retirement or investment account, and an interest in a lawsuit.  A person considering bankruptcy should particularly think about his or her intangible rights, for instance the right to a tax refund, a debt owed by another person, or the right to sue somebody, also known as a cause in action.

For the most part, the property of the estate includes property rights or interests that exist at the time the case is filed, and does not include earnings from services performed by the debtor after the case is filed, except in a chapter 13 case.  In a chapter 13 case, earnings during the case are included in the property of the estate.  In addition, the property of the chapter 13 bankruptcy estate includes property acquired by the debtor after the case is filed until it is closed, dismissed or converted.  In any bankruptcy case, the property of the estate includes property acquired within 180 days by will or inheritance, by a divorce decree, separation agreement or property settlement agreement, and from a life insurance policy.

For the most part, a trustee in bankruptcy steps into the debtor’s shoes with even greater rights than the debtor in the debtor’s property.  The trustee has the greater rights of a super-creditor or a bona fide purchaser and may set aside or avoid certain liens in, or transfers of, the debtor’s property.  For example, a trustee may be able to set aside a transfer of property from a husband to a wife or other relative made before the bankruptcy case was filed.  The trustee can administer or sell jointly owned property respecting the rights of any co-owners.  Thus, a trustee could sell property owned by a husband and wife, if either the husband or wife files bankruptcy, unless the property is owned by the couple as tenants by the entirety and there are no joint unsecured claims against the spouses.  In a debtor in possession case like a chapter 11, chapter 12, or chapter 13 case, the debtor may have some of the same rights as the trustee.

In Virginia’s scheme of equitable distribution, marital property may include property that is titled in the name of the other spouse. Title does not determine whether a husband or wife has an interest in his or her spouse’s property; all property acquired during the marriage before husband and wife separate is presumed to be marital property.   The starting point for equitable distribution in a Virginia divorce is classifying the property of the husband and wife as separate, marital or hybrid – a mixture of separate and marital.  Marital property is all property titled in the name of husband and wife, the marital portion of hybrid property and property acquired by husband or wife that is not separate property.  Separate property is property owned by the husband or wife before marriage, property acquired by will or inheritance or a gift during the marriage, but not from the other spouse, and the separate portion of hybrid property.  If marital property or significant personal efforts of either spouse during the marriage cause a substantial appreciation in the value of separate property, then that property can become hybrid property, with the increase in value being declared by the divorce court as marital property, regardless of the title.

The property of a bankruptcy estate includes both legal and equitable rights, that is, rights that could be enforced in a court of equity, which would include rights in a divorce case.  Thus, the bankruptcy estate of a husband or wife could include that spouse’s rights in marital property under Virginia’s equitable distribution scheme and would certainly include property that the debtor spouse has at the time of filing, or acquires within 180 days after filing, in a divorce or under a separation agreement or property settlement agreement.

You should consult with your Virginia bankruptcy or divorce lawyer to discuss the affect of a bankruptcy proceeding on your marital rights in property.

Authorized case study: contempt of court

The following is an illustration of the interplay of bankruptcy and divorce law based on real cases in the Circuit Court of Chesterfield County and the Eastern District of Virginia, Richmond Division, Bankruptcy Court, published without names with the client’s authorization.

Husband hired me to represent him in a divorce case in which he had been summoned to show cause why he should not be held in contempt of court for failing to comply with an order of the divorce court.  The order required him to pay the mortgage, utilities and keep his wife and child insured under his health insurance policy.  Husband had not been able to pay the mortgage and was facing a foreclosure sale of the marital residence.

The order had been presented to the court by the wife’s attorney and was entered by the divorce court at the same time Husband’s previous attorney withdrew from the case.  Neither the Husband nor his previous attorney had signed the order.  Husband did not attend the hearing when the order was presented to the court.  The order incorporated a court reporter’s transcript of a deposition at which the parties had discussed the terms of a separation agreement that the wife’s attorney stated she would later prepare for the parties to sign.

In Virginia divorce cases, a court can incorporate into a decree an agreement between the husband and wife.  To be enforceable, the separation agreement, also known as a marital agreement or a property settlement agreement, must be in writing signed by the husband and wife, or contained in a court order signed by the parties or recorded and transcribed by a court reporter and affirmed by the parties on the record personally.  In this case, wife’s attorney claimed that the deposition transcript was an agreement between the parties.

Husband decided to file a chapter 13 bankruptcy case to save the marital residence from foreclosure.  At the same time, we filed a motion to set aside the order incorporating the alleged agreement between the parties.  The divorce court judge postponed a decision on our motion and continued the contempt hearing to allow for the progression of the bankruptcy case.  The case was set for a final hearing several months later on the grounds for divorce, support, child custody and child support, and equitable distribution.

Wife filed an objection to Husband’s chapter 13 case, which was overruled by the bankruptcy court judge.  Wife filed a proof of claim in the bankruptcy case.  We objected to Wife’s proof of claim and the bankruptcy court disallowed it.  Husband sought and obtained relief from the automatic stay to continue his Virginia divorce case.  Husband’s chapter 13 plan was confirmed by the bankruptcy court.

A full hearing was held on all matters related to the divorce case and counsel submitted memoranda of law following the hearing.  Husband lost his job a month later and used his legal right to voluntarily dismiss his chapter 13 bankruptcy case.  Wife’s attorney again scheduled the case for a contempt hearing, claiming that Husband was in violation of the court order incorporating the alleged agreement of the parties.

Six months after Husband hired me, the court set aside the order incorporating the alleged agreement between the parties, holding that the Wife’s counsels representations that she would prepare a written agreement created a condition precedent to the formation of a contract between the parties.  Husband’s use of a motion to set aside the order and his chapter 13 bankruptcy protected him from being held in contempt of court for violating the invalid order submitted by Wife’s attorney.

You should consult with your bankruptcy or divorce attorney to determine whether a bankruptcy would serve your best interests during a divorce case

Do I receive any protection from my spouse’s bankruptcy?

One of the reasons for filing bankruptcy is the protection of the automatic stay, which goes into effect as soon as a case is filed and generally protects the debtor, the debtor’s property, and property of the estate from actions by creditors.  In a chapter 7 case, a husband or wife would not receive any personal protection from his or her spouse’s bankruptcy filing.  In fact, the automatic stay and the discharge in bankruptcy are personal to the debtor and an unsecured creditor could proceed against the non-filing spouse for the full amount of a joint debt.  However, a husband or wife might receive some benefit from the automatic stay with respect to actions by a secured creditor against jointly owned property.  For example, if you and your husband or wife were facing a foreclosure auction on your former marital residence, a filing by either spouse may stop the sale.

Chapter 13 is different and includes a codebtor stay that extends the protection of the automatic stay to the nonfiling spouse for consumer debts.  The codebtor stay would extend to a spouse, a former spouse, or any person who is liable with the debtor on a consumer debt.    The codebtor stay in Chapter 13 was primarily intended to benefit the husband or wife filing bankruptcy by preventing creditors from obtaining a benefit by pressuring codebtors close to the debtor, such as spouses, friends, relatives and fellow employees.

The codebtor stay offers little or no benefit to the nonfiling spouse if the spouse filing bankruptcy does not oppose, or cannot successfully defend, a creditor’s motion for relief from the automatic stay.  Sometimes creditors have sought relief from the automatic stay in a chapter 13 bankruptcy case in Virginia, but have neglected to seek relief from the co-debtor.  Typically, although actions taken in violation of the automatic stay are void, the court will grant relief from the co-debtor stay, finding that the purpose of the codebtor stay is no longer served once the creditor obtains relief from the automatic stay as to the debtor. See, e.g., In re Morris, 365 B.R. 613 (E.D. Va., 2007).

You should discuss with your bankruptcy or divorce lawyer how the bankruptcy of your spouse or former spouse affects you.

Can hostility between a father and mother affect the amount of child support in Virginia?

In an unpublished opinion, the Virginia Court of Appeals affirmed a divorce court’s decision to increase the amount of child support to cover childcare expenses because of the ongoing hostility between the husband and wife.  Kappeler v. Kappeler,  No. 0292-09-4, (October 13, 2009). http://www.courts.state.va.us/opinions/opncavwp/0292094.pdf

The ex-husband father and ex-wife mother had split joint custody of their children.  The children were enrolled in both before and after school childcare.  The mother filed a motion to increase child support to cover the costs of after school childcare not covered by the divorce decree.  Father also filed a motion to decrease child support.  As required in a motion to modify child support, both parties alleged a material change in circumstances: for the mother, a decrease in income and the desire to establish after school child care when she had custody, and for the father, his willingness and availability to provide such after school care.

The former husband testified in the divorce court that he was available to take the children after school and that after school childcare was not necessary.  The former wife testified that the former husband’s behavior was controlling and invading, with tension, hostility, anger and volatility.  The divorce court found a change in circumstances and granted the mother’s motion to increase child support and denied the father’s motion to decrease child support. The divorce court noted that the children could likely be exposed to the hostility between the mother and father during the daily transfers if the father were permitted to provide after school care.  The Virginia Court of Appeals held that the trial court had not abused its discretion in finding changed circumstances and that the pleadings were legally sufficient to raise the issues for the trial court’s decision.

You should consult with your Virginia family law lawyer to discuss whether hostility with your husband or wife may affect your child support payments.

Is remarriage a basis for modification of child support in Virginia?

A child support order may be modified in Virginia upon a material change in the financial circumstances of either party.  The support order may not be modified retroactively, but may be modified from the date notice is received by the responding party.  In a Loudoun County Virginia Circuit Court decision, Bruley v. Galer, Chy. No. 44053, October 5, 2009, a judge recognized that remarriage per se is not a basis for a modification of child support, but it may be a basis if the remarriage results in a termination of spousal support.  Under Virginia law, spousal support and maintenance will terminate upon the remarriage of the spouse receiving support or the death of either party, unless otherwise provided by an agreement.  If the remarriage eliminates the payment of spousal support to the parent receiving child support, then the remarriage is a material change in circumstances affecting the financial situation of both parents.

You should consult with your Virginia divorce or child support lawyer concerning a modification of your child support.

Can a husband be ordered to pay part of his stay-at-home wife’s student loan debts in a Virginia divorce?

The Virginia Court of Appeals upheld a divorce court’s equitable distribution ruling that a husband be ordered to pay 25% of his wife student loan debt incurred during the marriage, even though she did not work until after the parties separated, in the unpublished opinion of Layne v. Layne, Record No. 0978-09-3, October 20, 2009, .    The court restated the general rule that debt incurred during the marriage is presumed to be marital debt.  In this case, the wife testified that she used the student loans for household expenses.  Even though husband would not benefit from wife’s education, the family benefited from the proceeds of the student loan debts.

In addition, the trial court found that the condominium owned by husband before the marriage was hybrid property, part separate and part marital, in which the wife had an interest since the parties had lived in the property for a year and rented it out for several years while they were married.  The divorce court found that the wife’s contributions to the real property were more than nominal and that she should be entitled to share in its appreciation by receiving half the marital share of the property.

You should consult with your Virginia divorce lawyer concerning the equitable distribution of your marital property and debts.

How does living on credit cards affect a wife’s right to receive spousal support?

In an unpublished opinion, the Virginia Court of Appeals affirmed a Circuit Court judge’s award of fifty percent (50%) of a husband’s net military retirement pay and spousal support where the wife was living on credit cards, social security, and food stamps.  Darley v. Darley, No. 1216-09-4, October 6, 2009.  Although neither party had filed bankruptcy, the case is noteworthy as it addresses a common situation in both bankruptcy cases and divorce cases: a party living on debt instead of earned income.

The wife had obtained a spousal support order from the Juvenile and Domestic Relations District Court.  The husband obtained a divorce in Panama and filed a complaint for affirmation in a Virginia Circuit Court of the divorce from a foreign country, but did not appear to testify in the case.  The wife lost her job in April 2008 and was unemployed at the time of the evidentiary hearing in Virginia.  The wife’s income and expense statement showed a monthly deficit of $2,000.  The wife was living off credit cards, social security, food stamps, and the spousal support from the Juvenile and Domestic Relations District Court order.

In the equitable distribution portion of its decision, the Circuit Court awarded to the wife, fifty percent (50%) of husband’s military retirement pay, even though there was no evidence that the husband received income from any other source.  The court pointed out that equitable distribution is different from support and is based on the accrued rights of the wife in the distributed property, as distinct from the current financial situation of the husband and wife.

Nevertheless, the income from the distribution of his pension could be properly considered in determining the husband’s support obligation to his wife.  The fact that wife had a monthly deficit and was living off credit cards demonstrated her need for support, the first step in obtaining spousal support in Virginia, with the second step being the other spouse’s ability to pay support.  The court found that the award of spousal support to the wife did not exceed her standard of living established during the marriage.

You should consult with your Virginia bankruptcy or divorce lawyer to discuss the application of the law to the facts of your particular situation.

How long will my spouse’s bankruptcy delay my Virginia divorce?

As discussed in the answer to the question, “Will a bankruptcy filing stop my Virginia divorce case?”, the bankruptcy filing may stop aspects of a Virginia divorce case from continuing.  The length of the delay due to bankruptcy depends upon the type of bankruptcy filed by your husband or wife.

A chapter 7 case typically takes 4 to 5 months from the order for relief on the filing date until the order of discharge.  The automatic stay protecting the debtor, property of the debtor, and property of the estate starts as soon as the case is filed.  The first meeting of creditors is set 20 to 40 days after the filing date.  A creditor may file a complaint objecting to the discharge of the debtor, or a complaint objecting to the dischargeability of a particular debt, by filing an adversary proceeding within 60 days after the meeting of creditors.  If no complaints are filed, the clerk of the court may issue an order of discharge after about 10 days after the 60 day period expires.  Unless a party is granted relief from the automatic stay, the automatic stay expires against property when the property is no longer property of the estate and against the debtor when the discharge is granted or denied in a chapter 7 case or when the case is closed or dismissed.  The chapter 7 trustee may abandon property from property of the bankruptcy estate anytime after the case is filed, although the abandonment is usually announced at the meeting of creditors.  After the automatic stay ends, the debtor will be protected from collection of discharged debts by the discharge injunction.  As discussed in the answer to the question, “Can my spouse discharge a family law debt in bankruptcy?”, some family law debts can be discharged.

A chapter 13 case will typically last from 3 to 5 years.  In a chapter 13 case, property of the estate includes property acquired while the case is pending and earnings from services performed by the debtor during the case.  Unless otherwise provided in the chapter 13 plan, confirmation of the plan vests all property of the estate in the debtor.  These two provisions may complicate efforts by divorce counsel to address any portion of the debtor’s post-petition earnings in a separation agreement or property settlement agreement, particularly since actions taken in violation of the automatic stay may be void or voidable.  The better practice will often be for one of the spouses to file a motion for relief from the automatic stay in the chapter 13 bankruptcy case to continue and conclude the Virginia divorce case.

You should consult with your Virginia bankruptcy or divorce attorney to discuss how long your husband or wife’s bankruptcy will delay your separation or divorce proceedings.