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 4003(b)(1). 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.