October 20, 2017
“Should I stay or should I go now?
Should I stay or should I go now?
If I go, there will be trouble
And if I stay it will be double
So come on and let me know”
- The Clash (1982)
When a bankruptcy proceeding and a divorce proceeding are pending simultaneously, it can feel like you have been transported back in time to 1982 and the Clash’s lyrics “Should I Stay or should I go?” are once again all too relevant.
For individual Debtors, the financial tipping point for deciding to file for bankruptcy is often related to a divorce. When a party files for bankruptcy during a divorce proceeding, the family law attorney can really feel the full meaning of, “If I go there will be trouble, but if I Stay it will be double.” This can be true whether you represent the Debtor or the non-bankruptcy filing party. What actions are permissible in family court when one party has filed a bankruptcy petition?
The Automatic Stay (the “Stay”), in a bankruptcy proceeding, can be thought of as an injunction that takes effect the instant a bankruptcy petition is filed. Section 362(a) of the Bankruptcy Code provides for this protection. The Stay prevents creditors and others from collection efforts and from otherwise taking any action against the debtor and the debtor’s property; all of which is tied up in the bankruptcy estate and administration of the case.
The Stay is often an area of ambiguity for parties in a divorce proceeding. The Stay is in effect until a Discharge from bankruptcy is granted. This typically takes 6 months to occur in a chapter 7 filing but can take longer, and up to 5 years (60 months) in a chapter 13 filing.
Section 362(d) through (g) describe grounds and procedures to dissolve or, as bankruptcy lawyers say, “Lift” the Automatic Stay even while the bankruptcy case is open. The 2005 congressional bankruptcy reform expanded the exception of the Stay pertaining to domestic support obligations. In other words, it’s a lot harder to discharge certain debts in bankruptcy now than it was prior to the 2005 amendments. The Bankruptcy Code now allows some creditors to continue collection efforts by making certain “exceptions” to the broad injunctive effects of the Automatic Stay. Section 362(b) itemizes 28 exceptions to the Automatic Stay, some of which concern domestic relations issues.
The Stay does not apply to the commencement or continuation of actions or proceedings:
- 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 doesn’t determine the division of property of the estate; and
- Regarding domestic violence.
Many of the methods frequently used to collect domestic support obligations are also carved out from the reach of the stay:
- Withholding income that is property of the estate or property of the debtor for payment of a domestic support obligation;
- Withholding, suspending or restricting a driver’s license, a professional or occupational license, or a recreational license under state law, as specified by the Social Security Act (42 U.S.C. § 666(a)(16));
- Reporting overdue support as specified in the Social Security Act (42 U.S.C. § 666(1)(7));
- Intercepting a tax refund, as required by the Social Security Act or under an analogous state law; and
- Enforcing a medical obligation as specified by the Social Security Act (Title IV).
Don’t let a bankruptcy filing stop you from taking action consistent with exceptions outlined in section 362(b). It is important to understand when the Code “Stays” State action and when it does not. Some proceedings might continue in violation of the Stay, while other actions might be halted unnecessarily and erroneously. Section 362(b)(2) authorizes many domestic relations cases to be initiated or to continue, despite that a party to the proceeding files for bankruptcy. Hopefully, there is no more indecision bugging you, but remember it is always best to file a Motion with the Bankruptcy Court and ask, “Should I Stay or should I go now?”