The Automatic Stay in Bankruptcy; Chapter 7 Bankruptcy; Chapter 13 Bankruptcy and the Impact of a Bankruptcy Filing on Domestic Claims

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The Automatic Stay in Bankruptcy; Chapter 7 Bankruptcy; Chapter 13 Bankruptcy and the Impact of a Bankruptcy Filing on Domestic Claims BAPCPA AND ITS IMPACT ON OUR FAMILY LAW PRACTICES NORTH CAROLINA FAMILY LAW SPECIALISTS’ MEETING JULY 17-18, 2009 RALEIGH, NC PREPARED AND PRESENTED BY: Robert A. Ponton, Jr. [email protected] Samuel T. Wyrick, III [email protected] WYRICK ROBBINS YATES & PONTON LLP 4101 Lake Boone Trail, Suite 300 P.O. Drawer 17803 Raleigh, North Carolina 27619 919-781-4000 [This article was originally authored by Robert A. Ponton, Jr., and John T. Logan (Chapter 13 Trustee, EDNC). It has been updated for this presentation by Robert A. Ponton, Jr. and Samuel T. Wyrick, III.] The "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," Public Law 109-8, hereinafter “the 2005 Act,” became effective on Oct. 17, 2005. The legislation, representing the largest overhaul of the Bankruptcy Code since its enactment in 1978, contains numerous amendments significant to family lawyers. The 2005 Act makes its primary purpose very clear. In response to increased bankruptcy filings and substantial creditor losses, the 2005 Act is designed to eliminate perceived loopholes in the former Bankruptcy Code which allowed "bankruptcy abuse." Many of the provisions of the 2005 Act, including means testing (which compares the debtor's income to the state's median income to determine if the debtor may file Chapter 7), are intended to encourage the repayment of debts by making it more difficult for debtors to discharge debts through Chapter 7 bankruptcy and encouraging Chapter 13 bankruptcy filings. However, some of the most positive changes effected by the 2005 Act are those dealing with Domestic Support Obligations [hereinafter “DSO,” a new term of art in the Bankruptcy Code, defined in 11 U.S.C. §101(14A)]. This article addresses issues impacting family lawyers: namely, the automatic stay in bankruptcy; Chapter 7 bankruptcy; Chapter 13 bankruptcy and the impact of a bankruptcy filing on domestic claims. I. Domestic Support Obligations Section 101(14A) of the 2005 Act defines a DSO as a debt owed to a spouse, a former spouse, or a child of the debtor or such child’s parent, legal guardian, responsible relative, or governmental unit, which obligations are in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) and not assigned to a nongovernmental entity, unless assigned voluntarily for the purpose of 2 collecting a debt. The 2005 Act removed all qualifications on who is owed the spousal and child support. II. Notice Required to Holder of DSO and to State Child Support Enforcement Agency When There is a Bankruptcy Filing Under §704(a)(10) of the 2005 Act in a Chapter 7 liquidation, when there is a claim for a DSO against the debtor, the Trustee is under an affirmative obligation to provide written notice to the holder of the claim, and of the right of the holder to use the services of the applicable state child support enforcement agency for assistance in collecting child support during and after the case. The Trustee is also under an affirmative duty to provide notice of the obligation directly to the appropriate state child support enforcement agency, along with the name, address and telephone number of the holder of the claim. 2005 Act, §704(c)(1). Comparable duties apply to the Trustee under a Chapter 13 filing. 2005 Act § 1302(b)(6) and (d). Sample DSO notices for Trustees’ use, provided by the U.S. Trustee Program of the U.S. Department of Justice are included within Attachment 1. III. The Automatic Stay in Bankruptcy When Does the Automatic Stay Begin, and When Does it End? Section 362 is the automatic stay provision of the Bankruptcy Code. The automatic stay is effective immediately upon the debtor's bankruptcy filing, without any additional action required by the debtor. When the creditor spouse receives notice of a bankruptcy filing (irrespective of the chapter), such notice is also notice to the creditor spouse that the automatic stay is in effect. Generally, the automatic stay is effective until the debtor achieves his discharge, an order is entered by the bankruptcy court "lifting" the automatic stay, or the bankruptcy case is dismissed. Upon discharge, the automatic stay is 3 replaced by a permanent injunction that prohibits any collection of discharged debts. (Note: Solely for convenience, this article uses the masculine pronoun. Bankruptcy issues are gender neutral.) What Actions of the Creditor Spouse are Prohibited by the Automatic Stay? With specific exceptions which are discussed below, the automatic stay prohibits the creditor spouse from either beginning or continuing any judicial action (lawsuit, hearing, or execution) either against the debtor spouse [§§362(a)(1) and (2)] or against property of the debtor spouse's bankruptcy estate [§§362(a)(2) and (3)]. Therefore, if your client receives notice that his spouse has filed bankruptcy, your initial advice to your client is that his domestic case must be discontinued until your client obtains stay relief from the Bankruptcy Court. Obtaining stay relief to allow your domestic case to proceed in state court is very possible and is generally not expensive. Often it may be accomplished by entry of a Consent Order with the debtor, particularly if you are clear with debtor’s counsel that you want relief from the automatic stay only to liquidate your client’s claim for purposes of determining the amount and nature of the claim. The process requires filing a Motion (known as an adversary proceeding, not a complaint, in bankruptcy) for Relief from the Automatic Stay. In the Eastern and Western Districts of North Carolina, a motion is not required if a consent order is being tendered; in the Middle District, the motion must be submitted to the Clerk with the consent order. There is no filing fee required if a consent order is tendered with the motion, otherwise a $150.00 filing fee is required. The new Act, in fact, provides for special rights for child support creditors. Further, as discussed below, some actions can proceed without bankruptcy court involvement. The Automatic Stay Prohibits the Prosecution of Equitable Distribution Claims (Absent Relief from the Automatic Stay) There is no exemption within Section 362(b) for equitable distribution proceedings. The 2005 Act explicitly excludes division of property proceedings from its new exceptions to the automatic stay, at least to the extent that the marital/divisible property is property of the bankruptcy estate [§362(b)(2)(A)(iv)] (which it will be). 4 Therefore, the creditor spouse must seek relief from the automatic stay in the debtor spouse’s case prior to: 1. Filing any lawsuit for equitable distribution; or 2. Proceeding with a filed suit for equitable distribution; or 3. Attempting to enforce any equitable distribution judgment and/or distributive award with respect to property of the bankruptcy estate. The Following Actions by the Creditor Spouse are Allowed in Spite of the Automatic Stay The "non-stayed" proceedings, as contained within Section 362(b), are: (1) the commencement or continuation of a criminal action or proceeding against the debtor [be very careful here -- using a criminal action, such as "worthless check" charges, as a vehicle to collect a debt, is a stay violation]; (2) (A) the commencement or continuation of a civil action or proceeding: (i) for the establishment of paternity; (ii) for the establishment or modification of an order for DSOs [Note: For our purposes, DSOs are obligations to pay post-separation support, alimony, and child support (see discussion below on p. 6, Actions to Establish or Modify Support Obligations]; (iii) concerning child custody or visitation; (iv) for the dissolution of a marriage [absolute divorce], except to the extent that such proceeding seeks to determine the division of property that is property of the estate [Note: Equitable distribution proceedings are stayed]; or (v) actions regarding domestic violence; 5 (B) the collection of a DSO from property that is not property of the estate (see discussion below in Contempt Motions – Are They Stayed or Not? p. 7); (C) with respect to the withholding of income that is property of the estate or property of the debtor for payment of a DSO under a judicial or administrative order or a statute; (D) for withholding, suspension, or restriction of a driver's license, a professional or occupational license, or a recreational license, under State law, as specified in Section 466(a)(16) of the Social Security Act; (E) for reporting of overdue support owed by a parent to any consumer reporting agency as specified in Section 466(a)(7) of the Social Security Act; (F) for interception of a tax refund, as specified in Sections 464 and 466(a)(3) of the Social Security Act or under an analogous State law; or (G) for enforcement of a medical obligation, as specified under Title IV of the Social Security Act. Easily Understood Non-Stayed Domestic Claims Claims for absolute divorce, paternity, custody, visitation, domestic violence, license termination and restriction, and tax refund interception can proceed in State Domestic Court without bankruptcy court involvement. Actions to Establish or Modify DSO’s – Are They Stayed or Not? As observed in Norton Bankruptcy Law and Practice 3d, §175:6, under pre-2005 §362(b)(2)(A)(ii), a spouse was required to make a motion for relief from stay and at least a minimal showing of good cause to secure the right to pursue support relief in a domestic relations case in a state court. There is no longer the need for formal relief from the stay for most actions involving DSO’s. 6 In In Re: Sunny Pamaswamy De Wakar 2007 WL 4353800 (Bkrtcy.E.D. Va. 2007), the question before the court was whether a Chapter 11 debtor in possession – who was separated from his spouse, but not subject to any court or agency order, or separation or property settlement agreement, for the payment of spousal or child support – was required to give his spouse the special notices mandated by the Bankruptcy Code for holders of “domestic support obligations.” (See Discussion above on p.
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