A cloudy sky illuminated by a traffic light hanging from a pole.

Bankruptcy and Family Law: When Can You Proceed?

Domestic issues are often precursors to a bankruptcy filing for one or more of those involved. The intersection between family law and the automatic stay provisions of the Bankruptcy Code is often cloudy. The automatic stay may prevent certain matters from moving forward in family court, while other actions may continue without pause if they fall into one of the various exceptions to the Stay enumerated in the Bankruptcy Code. This article will take a brief look at those exceptions and when they might apply.

When a bankruptcy case is filed, an automatic stay is issued pursuant to 11 U.S.C. §362. The Stay prevents the continuation or commencement of most legal actions and collection against the Debtor. In general, if a divorce case is pending at the time a bankruptcy is filed by one of the parties, it is typically best to seek relief from the bankruptcy stay before proceeding towards final judgment. This is because the bankruptcy stay prohibits proceedings to divide or split up property of the bankruptcy estate. While there are exceptions that can become more complicated, in many cases, a relatively straight forward motion may be filed with the bankruptcy court that will allow relief from the bankruptcy stay to proceed with the divorce process.

However, there are also a number of automatic exceptions to the automatic stay that are specifically tied to domestic matters. These actions may proceed without seeking relief from the stay. Section 362(b) of the Code states that the filing of a bankruptcy petition does not act as a stay on a proceeding:

  • To establish paternity;
  • To establish or modify an order for a domestic support obligation;
  • Concerning child custody or visitation;
  • To dissolve a marriage, as long as it does not determine the division of property of the estate; and
  • Regarding domestic violence

These exceptions allow you to proceed against a debtor for an order relating to one of the above items without seeking relief from the bankruptcy court or a determination in state court that the stay does not apply. Practically speaking, the exceptions give creditors the ability to still collect against a Debtor for “domestic support obligations” even after a bankruptcy is filed. This means that the debt can be collected from the debtor’s post-petition wages and certain other non-estate property. For this reason, wage withholding is permitted to continue after a bankruptcy stay is in place.

Despite these exceptions, it is still essential to understand that a family debt creditor must be collecting debt that qualifies as a “domestic support obligation” under the Bankruptcy Code. It is not always clear whether the debt is a support obligation, or rather a property settlement debt, which is not afforded the same automatic relief from the Stay. This distinction is also important when determining whether a family debt may be discharged in a bankruptcy proceeding. This issue will be addressed in an upcoming article.

While the intersection between family law and bankruptcy can lead to hesitation, in many circumstances a brief review of the rules regarding the automatic stay and the exceptions will result in a clear course of action.

For further information regarding these issues please contact the attorneys at Keller & Almassian, PLC.

More Educational Insights

Subchapter V Chapter 11 Update: Debt Limit Extension

Subchapter V Chapter 11 Update: Debt Limit Extension

In late February of 2021, a bipartisan bill was introduced that would extend continued relief to businesses that have been impacted by the Covid-19 pandemic.  The bill is referred to as the Covid-19 Bankruptcy Relief Extension Act, is intended to continue certain...