How a bankruptcy affects someone who is divorced depends a lot on the settlement agreement. A primary concern, for the spouse owed money, is what will happen to spousal support, child support and property settlements.
What Happens to Child Support, Alimony when Ex Declares Bankruptcy
| Author: Casey Clark-Ney | Posted: 04/20/09 | ||
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What Happens to Child Support, Alimony when Ex Declares Bankruptcy
Sometimes, surviving a divorce is only half the battle. The rest of the conflict often ensues in bankruptcy court. According to "The Fragile Middle Class: Americans in Debt," 40 percent of individuals who file for bankruptcy do so as a direct result of divorce, medical crisis or unemployment.
"The main reason people get divorced is because of money," said Matthew Weber, a certified public accountant for Citrin Cooperman & Company . "It's hard enough to make ends meet when you are a single household. Sometimes it is even harder to operate two households."
How a bankruptcy affects someone who is divorced depends a lot on the settlement agreement. A primary concern, for the spouse owed money, is what will happen to spousal support, child support and property settlements, said Weber, a forensic accountant. "The rules (for bankruptcy) are pretty straightforward," he said, adding, "The cases are pretty complicated."
Former New Jersey Gov. James E. McGreevey appears to be struggling with this very situation.
On Wednesday, McGreevey told a judge that he wants to pay child support for the 6-year-old daughter he has with his estranged second wife, Dina Matos McGreevey, as well as for a child from an earlier marriage, but he cannot afford to pay alimony. He says he works two jobs, makes $48,000 a year, pays $11,000 a month in expenses and owes a quarter-million dollars to his boyfriend, Mark O'Donnell, for legal fees.
"I want to pay child support. I want to fulfill my obligations," McGreevey was quoted in an article by The Associated Press. "Unfortunately, I have had to bankrupt myself to pay legal fees upon legal fees."
McGreevey, 50, is $11,000 behind in his child support to Matos McGreevey, who wants to maintain the lifestyle she would have had with her husband had he not had to resign in 2004 during a gay sex scandal. The two have lived apart since he declared he was gay. In the financial phase of the couple's divorce trial this week, McGreevey has said he simply cannot afford paying alimony to his former wife, who is going to lose her $82,000-a-year job as a hospital administrator when the hospital closes soon. If your ex files for bankruptcy, all creditors -- including you if you're owned spousal or child support -- would receive notification from the court. Then you have to file a claim right away or " the court can discharge" the debt, Weber said. "People who are creditors in bankruptcy would be well advised to assume the worst about what the judge will decide," said attorney and divorce mediator Lee Borden.
Weber said many people go back to their divorce attorney when they discover their ex has filed for bankruptcy, which is not a good idea. "It's very important that if this is going on, that they retain a bankruptcy professional," he said. Borden agreed, saying "Most people who are filing for bankruptcy are doing it with the help of a bankruptcy lawyer," and that it makes sense that, as a creditor, you'd want a bankruptcy lawyer, too.
ALIMONY AND CHILD SUPPORT
Thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), individuals who are owed child or spousal support are protected from losing those funds in court. According to Borden, the laws that served primarily as a bankers' protection bill also helped with family law claims. "All family law claims are now called first priority. That means that they enjoy a priority when it comes time for the trustee to decide who gets paid and who doesn't," Borden said.
Another primary difference, thanks to the BAPCPA, is debtors no longer have the right to enjoy an "automatic stay" when it comes to certain family law claims. "When you file for bankruptcy ... One of the very first things that happens is that all creditors have to quit picking on you for a little while," Borden said. "What the automatic stay says is that when I file for bankruptcy you can't pick on me for a while. It's a powerful incentive for people to file for bankruptcy."
Before the protection act, Borden said lawyers couldn't prosecute the family law claims until the end of the automatic stay. That, however, is no longer the case when it comes to child support and spousal support. "Child support and alimony, both of these are current supports, can be processed and prosecuted even despite the stay," Borden said. "It in fact, now enjoys a privileged position."
Weber echoes Borden's claim, "Support, whether it's child support, maintenance, alimony, are not discharged," he said. This rule, Borden said, does not apply to property settlements or back support.
Borden also warned that bankruptcy judges have a primary objective to assist the debtor, not the creditor. "Bankruptcy judges view the world through discharged colored glasses. They are all about helping debtors to get back on their feet," he said. "They want to get the debtor as fully discharged as possible."
Unfortunately, the issue of back support is not as secure in terms of bankruptcy. "So many of these debtors do owe back support," Borden said. "If it's back support, they've got a more difficult road to hoe. The stay can keep them from pressing that claim."
Regardless of the money owed to the creditor, Borden encourages anyone with a family court claim to retain an attorney as soon as possible and request the court's favor. "It probably would be prudent for somebody who has such a claim to ask the court to not subject the stay," he said.
Property settlements are another big issue in bankruptcy court. Settlements can include situations in which an ex-spouse agreed to pay for the mortgage or car payment, Borden said. Settlements can also entail the owing of any kind of monetary family court award, other than support.
According to Borden, the amount of money the creditor is awarded will first be dependent upon the chapter filing. "A property settlement claim is fully non-dischargeable if the filing is a Chapter 7 ... that is not the case if it is a Chapter 13," Borden said. "Then, the whole thing can be discharged. It certainly hurts when you are the creditor."
TYPES OF BANKRUPTCY
Chapter 7 bankruptcy, Borden said, is what is known as "straight bankruptcy" or "liquidation." "They take everything they can find and bail them out," Borden said. "When its finished, they owe no money."
Chapter 13, on the other hand, allows the debtor to lower his or her interest rates and slowly pay down the debt. This type of filing is often referred to as "debtors court" or "restructuring," Borden said.
In another example, Borden said if an ex-spouse agrees to take over a car payment that was financed under the couple's names, and the individual files bankruptcy, he or she is no longer required to pay that debt. In return, however, the lending agency can turn to the other spouse and request that money from him or her, even if the ex-spouse still has the vehicle.
According to Weber, settlements require a certain amount of examination. "The situation is this. If you have a property distribution ... you now have to take a look at that," he said.
A lot of times bankruptcy cases involving family court claims that are discharged eventually wind up back in family court, Weber said. "When somebody files for bankruptcy, that really only applies to the collection of debt," Weber said. "When child support and maintenance are involved you now have to go back to the family court."
Here is where Weber plays a primary role. "The court is going to take a look. They want to know who it is going to harm more, the payer of the recipient," he said. In a recent case, Weber said a woman was owed $1 million and her ex-husband filed bankruptcy. "I did an analysis of both of their lifestyles," Weber said. "She had basically nothing." On the other hand, Weber said the ex-husband was maintaining his lifestyle despite the folding of his business.
The main question the family court is going to ask, Weber said, is who is most harmed by the property settlement and bankruptcy. "We compare the harmfulness to him as opposed to her," he said. "It would certainly harm her worse (to lose the payout)."
It is Weber's task to review each individual's lifestyles and determine what, if anything, has really changed in terms of economic income. "I'm trying to really look behind the numbers and see what's going on, I prepare a report and we have to testify in court," Weber said.
The court's decision, is going to ride on the judge's opinion. "There is going to be two conflicting experts and the judge will believe, who he believes based on what is presented," Weber said. "Sometimes, they try to paint a picture that is many times not accurate of their true economic income. Many times somebody is just trying to shift income around."
Casey Clark Ney is holds a B.A. in communication and has more than six years experience in newspaper and magazine writing. Her Web site can be viewed at www.CaseyClarkNey.com. E-mail her at caseyclarkney@earthlink.net
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