How the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) Affected Family Law Issues
I.
CHANGES IN THE DEFINITION AND TREATMENT OF SPOUSAL SUPPORT AND CHILD SUPPORT CLAIMS
A. Prior law: Under the prior Bankruptcy Code (“the Code”), the definition of claims for spousal support and child support was primarily left to state law, although Section 101(12A) of the Code defines “debt for child support” as a debt of a kind specified in Section 523(a)(5) of the Code for the maintenance or support of a child of the debtor. In other words, other than to look to state law, the prior Code defined child support in terms of its non-dischargeability.
B. New support definition: Under BAPCPA, a new definition was added for a “domestic support obligation” (hereinafter “DSO”) at Section 101(14A). The new section states:
“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 non-bankruptcy 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 application 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 non-bankruptcy 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.” (emphasis added)
This definition of DSOs largely comports with the already existing definition of debts that are not dischargeable as a result of Section 523(a)(5) of the Code. Accordingly, existing appellate decisions construing the terms “alimony,” “maintenance,” and “support” under the prior Code will still provide guiding precedent under BAPCPA.
C. RDPs Excluded: Although the term “domestic support obligation” has a certain ring suggesting otherwise, arguably excluded from the new definition are obligations for support that may be owing to Registered Domestic Partners (RDPs), even though such awards may now be ordered in actions brought under the California Family Code after January 1, 2005 pursuant to the provisions of Family Code § 297.5. Such new definition accords with the federal “Defense of Marriage Act” (DOMA), which excludes from recognition under federal law same sex marriages or support obligations arising from such relationships. This may raise serious concerns for California family law practitioners, whose practices may be expanding to address the needs of RDPs, who can either be members of the gay and lesbian community or seniors who elect to become RDPs to avoid the loss of Social Security and other benefits. While traditionally, the prior Code allowed state law to govern the determination of just what constitutes an order for alimony, maintenance or support, BAPCPA incorporates a definition that excludes all but support owing to a spouse, former spouse or child, leaving obligations of support to RDPs outside the protections. Even opposite-sex seniors who have chosen to become RDPs are excluded. But see discussion of In re Cusimano, 8:10-bk-23646-ES (Bkrtcy.C.D.Cal. November 12, 2013) in Recent Developments.
III.
INCREASED PRIORITY OF DOMESTIC SUPPORT OBLIGATIONS
A. Prior treatment of support claims: In bankruptcy parlance, the term “priority” refers to the classification and order of payment of certain unsecured claims in the distribution of dividends paid from the bankruptcy estate. As priority claims are paid ahead of general unsecured, non-priority claims, such treatment is highly favorable to the priority claim holder, especially where there are insufficient estate assets to pay all claims in full, as is typically the case. Under the prior Code, obligations for spousal support and child support were deemed priority claims under Section 507, and were assigned a seventh priority, just ahead of tax claims owing to the Internal Revenue Service and other state taxing authorities, and behind administrative claims and other claims rarely arising in a consumer case, e.g., employee wage and benefit claims, debts owing to grain storage facility operators and fishermen, etc.
B. Enhanced Priority Classification and its Effect: BAPCPA elevates DSOs to a first priority claim. However, it does not stop there, as the first priority class has been subdivided into three subclasses. Subclass (A) is assigned the highest priority and includes all DSOs owing to a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative.
However, if the domestic support claim is assigned by operation of law to a governmental unit, it is relegated to a Subclass (B) status behind nonassigned claims. If the assignment is voluntarily for collection, the claim retains its Subclass (A) status. While this would appear to leave Subclasses (A) and (B) as the highest priority, in fact new class (C) trumps both, as it is reserved for claims of administrative expenses of trustees appointed in Chapters 7, 11, 12 and 13 to the extent such expenses are to be paid in cases where assets are available to pay domestic support claims.
The elevation of the domestic support claims to first priority status, while touted as a “pro family” measure, is largely symbolic, given that few claims of higher priority exist in consumer cases under existing law (see above), the vast majority of consumer Chapter 7 cases are “no asset” cases, i.e., all assets are claimed as exempt and/or are of nominal value to the estate and insufficient to warrant liquidation – thus “no assets”, or in cases filed under Chapter 13, where confirmation of the plan requires that it provide for payment in full of all priority claims, including child and spousal support.
IV.
ALLOWANCE OF POST-PETITION INTEREST ON DOMESTIC SUPPORT OBLIGATIONS PAID THROUGH CHAPTER 13 CASES
A. Interest on support claims: Under prior law, while child and spousal support obligations were classified as priority claims and pursuant to Section 1322(a)(2) required to be paid in full as a condition of confirmation of a Chapter 13 plan (see below), payment of interest through the plan was not allowed on such claims. Section 502(b)(2) of the Code provided that post-petition interest accruing on a priority claim is generally not considered to be part of the claim and therefore was not allowable as a claim against the bankruptcy estate. As a result, debtors emerged from successful completion of Chapter 13 plans, only to confront substantial nondischarged claims for unpaid interest accruing on the support claims during the plan tenure. With plans of up to 60 months duration, at the lawful rate of 10% APR, such interest claims could be substantial and impair the debtors’ fresh start.
B. Interest allowed in 100% plans: As a result of changes in BAPCPA, debtors in Chapter 13 may now provide that, in addition to the payment of the priority support claim in full, already a requirement for confirmation of Chapter 13 plans, they may propose to pay accruing post-petition interest on the claim, thereby insuring that debtors emerge free of unpaid support claims. The payment of such interest is a permissive provision, not mandatory, and is permitted only in cases where the plan otherwise provides for all allowed claims. In other words, in cases where the debtor proposes less than 100% payment of allowed unsecured claims, payment of interest on nondischargeable claims is not permitted.
C. Certification of payment of post-petition support: In addition, BAPCPA requires that prior to granting a debtor a discharge upon completion of a Chapter 13 plan, the debtor must certify that all post-petition support, as well as pre-petition support obligations provided by the plan, have been paid as a condition to discharge.
V.
PAYMENT IN FULL OF PRIORITY DOMESTIC SUPPORT CLAIMS AS CONDITION OF CONFIRMATION OF CHAPTER 13 PLANS.
A. Payment of support arrears claims as condition to confirmation: A Chapter 13 plan that does not pay all DSOs in full cannot be confirmed over objection by the domestic support unless the debtor proposes to commit all disposable income into the plan. Thus, the domestic support creditor holds a powerful hand in situations where the debtor lacks income sufficient to pay such claims in full, whether in a 60-month or shorter term plan. Debtors in such cases must negotiate terms acceptable to the domestic support creditor or pledge all disposable income to the plan for the full 60-month term.
B. Payment of current support as condition to confirmation: As a condition to confirmation of Chapter 13 plan, BAPCPA requires the debtor to demonstrate that he or she is current with payment of all post-petition DSOs. The burden is not upon the domestic support creditor to object where post-petition support defaults exist. Instead, BAPCPA requires that the debtor affirmatively establish that such condition be met. Furthermore, the debtor’s failure to remain current in the payment of post-petition will be grounds for dismissal.
VI.
THE ELIMINATION OF AFFIRMATIVE DEFENSES TO NONDISCHARGEABILITY OF NON-SUPPORT MARITAL DEBTS IN CHAPTERS 7 AND 11
A. “Marital debt” exception to discharge under prior law: The addition of Section 523(a)(15), the “marital debts” exception to discharge, in 1994 was a substantial change in existing law, as for the first time all non-support debts owing to a spouse or former spouse arising under a marital settlement agreement or a judgment of dissolution of marriage or legal separation were made presumptively non-dischargeable, shifting to the debtor the burden of proving the existence of one of two available defenses. Once the non-debtor spouse or former spouse established that the claim arose under the terms of a marital settlement agreement or judgment of dissolution or legal separation and not for or in the nature of support (if for, or in the nature of support, such claims was conclusively nondischargeable and the inquiry ended there), then the debtor was given the opportunity to demonstrate that either the debtor was unable to pay the claim from income otherwise needed to maintain and support the debtor and the debtor’s dependents, and to operate the debtor’s business where engaged in business, or alternatively that the benefit of the discharge to the debtor outweighed the detriment to the spouse or former spouse.
B. BAPCPA’s elimination of the “affirmative defenses”: BAPCPA entirely eliminated the affirmative defenses to nondischargeability claims made under Section 523(a)(15), no doubt much to the relief of the bankruptcy judges charged with hearing what many considered tawdry tales of misfortune. While non-debtor spouses no doubt applaud the elimination of the affirmative defenses that bred much litigation in the bankruptcy courts over the past 11 years, the ability to discharge such non-support claims in Chapter 13 has been preserved. Continuing prior law, while nondischargeable in Chapters 7 and 11, non-support claims owing to spouses or former spouses that arise under the terms of marital settlement agreements or judgments for dissolution or legal separation remain dischargeable as general unsecured claims in Chapter 13. However, as discussed elsewhere, with BAPCPA’s tightening of the definition of “disposable income” in Chapter 13, the prospects of a meaningful repayment of general unsecured claims in such cases appears to be enhanced.
C. No marital debt exception for claims owing to non-spouse third parties: It should be noted that in order for such non-support claims to be excepted from discharge in Chapters 7 and 11, the debt must be owing to the spouse or former spouse. Cases construing Section 523(a)(15) under the Code have long held that the assignment of such claims is fatal, and there exists no implied exception for claims owing to third parties that are in the nature of non-support claims. Thus claims owing to the non-debtor spouse’s attorney, to court appointed minors’ counsel, child custody evaluators and other third parties cannot be saved from discharge under Section 523(a)(15). However, as noted above, such claims may continue to be excepted from discharge under the provisions of Section 523(a)(5) as being for, or in the nature of support, as this section and the long chain of cases construing it remains largely unchanged by BAPCPA.
VII.
CHANGES IN THE SCOPE OF THE AUTOMATIC STAY AFFECTING FAMILY LAW CLAIMANTS
A. Prior law: Upon the entry of an order of relief in a bankruptcy case, the filing of the petition in a voluntary case, a stay comes into existence automatically. No further steps were required and no judicial action needed be taken by the court. The automatic stay served to stay all proceedings against the debtor or against property of the estate, expect with regard to those exceptions to the stay as provided by the Code. Unless the stay was lifted or modified by court order, it remained in effect until a discharge was granted (or denied) or the case was dismissed. The prior Code was amended in 1994 to broaden the exception to the scope of the automatic stay to allow not only the enforcement of child and spousal support obligations against the debtor and the debtor’s property which is not property of the estate, e.g., post-petition income, but to permit establishing and modify support obligations and establishing paternity as an incidental proceeding to obtain support.
B. Expansion of exceptions to automatic stay: BAPCPA further modified the automatic stay by expanding the exceptions to the stay to include the commencement or continuation of proceedings (1) to determine custody and visitation, (2) dissolution of marriage except to the extent of property that is not property of the estate, such as ERISA qualified pensions; (3) domestic violence proceedings; (4) collection of domestic support claims from property of the debtor that is not property of the estate; (5) collection of domestic support claims from income that is property of the debtor or the estate; (6) license suspension proceedings; (7) credit reporting; (8) tax refund intercepts; and (9) enforcement of medical obligations.
These were not insignificant changes, as the courts have generally held that exceptions to the automatic stay are to be strictly and narrowly construed to the limited exceptions enumerated. As a result, non-debtor spouses had previously been forced to seek orders from the bankruptcy court lifting or modifying the stay, an often burdensome and time-consuming step that many family law litigants can ill afford. With the expanded exceptions to the stay, virtually all phases of a typical dissolution proceeding, other than the division of the community estate, can now proceed notwithstanding one of the spouses filing bankruptcy. Thus, bifurcations as to status can proceed, custody determinations made, even “kick-out” and other personal restraint orders issued, even though the cost of pursuing or defending such proceedings, or the impact of such orders may significant effect the debtor spouse financially. Gone are the days when the burden of proceeding is shifted to the nondebtor spouse faced with a bankruptcy proceeding.
C. Query: With the expansion of the exception to the automatic stay now encompassing “the commencement or continuation of . . . a proceeding . . . for the dissolution of a marriage”, can a nondebtor spouse also seek an award of pendente lite attorney’s fees and costs in the face of bankruptcy arguably filed by the other spouse in an effort to thwart the nondebtor spouse’s attempts to obtain pendente lite relief? The inclusion of the limiting language to the new exception of “except to the extent that such proceeding seeks to determine the division of property that is property of the estate” would seem to suggest that such an award would be permissible as long as not ordered paid from property of the estate.
D. Caveat: As the expanded exception speaks to the enforcement of the newly redefined “domestic support obligations” and to “proceedings for the dissolution of marriage”, actions involving RDPs are excluded from the exception, so too possibly are proceedings for legal separation and annulment inadvertently omitted. But see discussion of In re Cusimano, 8:10-bk-23646-ES (Bkrtcy.C.D.Cal. November 12, 2013) in Recent Developments.
VIII.
LIMITATIONS ON EXEMPT PROPERTY
A. What State Exemption Laws Apply? Although there exists a federal exemption scheme, it has a state-by-state “opt out” election and California long ago opted out. This remains true under the new Act, but the right to elect California’s exemptions, which tend to be more generous, is now limited. Debtors must now use the exemption laws available in the state where the debtor has been domiciled for the past 730 days (2 years). However, in cases where the debtor has not resided in California for the 730 days prior to the bankruptcy filing, he or she must count back 730 days, then use the exemptions allowed by the state in which he or she resided for the greatest portion of the 180 days prior thereto.
In other words, a debtor who moved to California from Ohio 690 days prior to the filing, and thus fails to meet the 730 day rule to claim a California homestead of $75,000 to $175,000 (see below), must look to the 180 days before that date. If that debtor had previously been living in California, took a job in Cleveland and was laid off after five months (150 days) and returned to California, he would not have met the 730 day domiciliary requirement and yet for the majority of the 180 day period prior to the 730 day period would have been domiciled in Ohio. His reward? A paltry $5,000 Ohio homestead exemption, rather than a California homestead exemption of up to $175,000.
B. Limitations on Homestead – BAPCPA: To combat the problem of debtors relocation to states with unlimited homesteads, e.g., Iowa, Texas and Florida, under BAPCPA, if the debtor acquired the homestead within 1,215 days (3 years, 120 days) prior to filing the bankruptcy, then the homestead cannot exceed $125,000. However, to the extent that a debtor “rolled over” a homestead from another state within the 1,215 days, the amount of the homestead allowed in the other state will not be counted against the “cap”. In effect, in California where maximum homestead is $175,000, this would allow seniors, the disabled and the class of working poor aged 55 or older to rollover up to $50,000 from a homestead in another state that allowed a homestead exceeding $125,000.
C. Homestead “Surcharged” by Fraudulent Transfers Made within 10 Years: If, within 10 years prior to the filing of the petition, the debtor transferred non-exempt property with the intent to hinder, delay or defraud creditors, BAPCPA allows the debtor’s homestead to be “surcharged”, i.e., reduced by, the amount of the fraudulent transfer.
D. Retirement Funds: On this issue, the news has been good, with IRA accounts having been found by the U.S. Supreme Court in the case Rousey v. Jacoway to be the equivalent of ERISA-protected qualified pension and retirement plans, and the new Act granting a specific exemption for all forms of retirement. Mirroring this case, under the new Act, all retirements are subject to being claimed as exempt. Under BAPCPA, IRA accounts may be claimed exempt up to $1,245,475 per case. That’s right! Well over a million bucks. It remains unsettled, but it appears that BAPCPA apparently limits the million-dollar IRA to one per case, not one per debtor in a joint case.
E. What Property is Not “Property of the Estate”: As before, BAPCPA recognizes that certain property of debtors never becomes “property of the estate” if transfer restrictions under applicable non-bankruptcy law prevent the property from being transferred in satisfaction of creditor claims, e.g., ERISA-qualified retirement and pension funds, certain spendthrift trusts (see more below). Two new classes of property have been added to this list: 1) Debtors’ Matching Contributions (Debtor employees’ own contributions, and not merely their employers’ contributions, to ERISA-qualified plans are now fully exempt under BAPCPA); and 2) Educational Accounts (BAPCPA provides for a limited exclusion of funds deposited by a debtor into educational retirement accounts and qualified state tuition programs for the benefit of the debtor’s child or grandchild. The amount which can be claimed exempt is limited to $6,225 deposited more than one year but less than two years before the bankruptcy filing, and an unlimited amount more than two years prior to filing, subject to Internal Revenue Code restrictions on such accounts)
1. Restrictions on Self-Settled Trusts: BAPCPA allows trustees to “avoid”, i.e., set aside, transfers by debtors of property made within 10 years of bankruptcy filing if (1) the transfer was made to a self-settled trust, (2) the transfer was made by the debtor, (3) the debtor is the beneficiary of the trust, and (4) the transfer was made with the actual intent to hinder, delay or defraud a creditor.
IX.
BANKRUPTCY SET ASIDE POWERS REGARDING MARITAL TRANSFERS INCIDENT TO FAMILY LAW PROCEEDINGS
Although valid and enforceable as between the spouses, the California Supreme Court has made clear that a marital settlement agreement (“MSA”) is not exempt from the Uniform Fraudulent Transfer Act. Interspousal property transfers pursuant to an MSA are subject to set-aside under the UFTA at the behest of defrauded creditors.
In the bankruptcy case In re Beverly , the BAP observed “It is settled California law that a transfer accomplished through an MSA can be avoided as a fraudulent transfer pursuant to UFTA.” As the Beverly court went on to observe:
“The [California] state supreme court noted it is California legislative policy that, in allocating debts to divorcing parties, account be taken of the rights of creditors “so there will be available sufficient property to satisfy the debt by the person to whom the debt is assigned.”
“Moreover, it is also California legislative policy that creditors be protected from fraudulent transfers, including transfers between spouses. Accordingly, transfers before and after dissolution can be avoided as fraudulent transfers. When a court divides marital property in the absence of agreement by the parties, it must divide the property equally, but an MSA need not be equal. From these considerations, the California Supreme Court concluded that divorcing couples do not have “a onetimeonly opportunity to defraud creditors by including the fraudulent transfer in an MSA.” (Citations omitted.)
Thus, while transfers between spouses under the terms of an MSA (or stipulated judgment) are not “cloaked” with impunity simply because approved by a family court, Beverly left unresolved whether all judgments rendered in family law cases are vulnerable to set aside if one of the spouses then seeks relief in bankruptcy and a trustee seeks to avoid a transfer of property ordered in the divorce to recover property for the benefit of the bankruptcy estate. That issue was recently clarified, if not entirely resolved in In re Bledsoe.
In Bledsoe, wife had filed for divorce and husband responded. However, based on wife’s failure to comply with discovery orders, her petition was stricken and husband proceeded to judgment by default prove-up – hardly anyone’s idea of a “contested” proceeding. At prove-up, the family court issued its judgment dividing the marital estate and awarding certain properties to each spouse. However, the following year wife filed for bankruptcy relief, and the trustee appointed in wife’s bankruptcy case sued husband to set aside the property transfers, alleging constructive fraud under the UFTA, asserting that while there was no actual fraud, nevertheless the transfers pursuant to the dissolution judgment were voidable because husband received property of much more value than wife, an allegation husband denied.
The bankruptcy court granted husband’s motion for summary judgment, which the district court affirmed on appeal. The trustee then appealed to the Ninth Circuit, which affirmed, holding that: “…[W]e hold that a state court’s dissolution judgment, following a regularly conducted contested proceeding, conclusively establishes “reasonably equivalent value” for the purpose of § 548, in the absence of actual fraud.” Further, rejecting the trustee’s arguments that such effect should not be given a default judgment, the court held that: “We disagree. A default judgment has “the same solemn character as [a] judgment[ ] entered after trial.” There being no “suggestion of collusion, sandbagging, or indeed any irregularity” in the dissolution proceedings, we hold that the rule applies here.” (Citations omitted)
Clearly, if a default proceeding was treated by the Bledsoe court as a “contested proceeding”, then a regularly conducted trial will enjoy the same treatment. But family law is perhaps like no other field of practice. Issues are often resolved piecemeal, with one issue settled in chambers off the record, others by offers of proof and argument, yet others in full-blown evidentiary proceedings held in open court on the record, with the remaining minor issues resolved in the hallways at the urging of harried family court judges anxious to get to other matters on their busy calendars.
