June 6, 2012 – Divorce may be a leading cause of bankruptcy, and bankruptcy may be a leading cause of divorce. Either way, the following situation is becoming more common: A divorce resulting in one or both parties filing for bankruptcy, particularly if the divorce is fiercely contested and attorney’s fees are awarded to one of the parties in the divorce.
It is well-known that support-related obligations, such as customary child support or maintenance, are nondischargeable under the Bankruptcy Code.1
But the situation is less certain when a divorce court orders an ex-spouse to pay obligations not customarily support-related, such as a court-ordered obligation to pay attorney fees. Indeed, the bankruptcy courts are inconsistent in determining the dischargeability of debts that are not directly tied to “domestic support” in the traditional sense of child support or maintenance.
Some bankruptcy judges have held that debts not directly tied to support of the spouse or child, such as awards of attorney fees, are dischargeable in bankruptcy.
But other bankruptcy courts have found that new language in the Bankruptcy Code enlarges what constitutes a nondischargeable domestic support obligation.
Fortunately for family law practitioners in Wisconsin, the U.S. Bankruptcy Court for the Eastern District of Wisconsin visited these questions in Zimmermann v. Hying.2
Domestic Support Obligations as Defined by the Bankruptcy Code
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made fundamental changes to the Bankruptcy Code. For one, BAPCPA expanded nondischargeable debts that qualify as “Domestic Support Obligations” under 11 U.S.C. § 523(a)(5).
The Bankruptcy Code defines “Domestic Support Obligation” as the following:
- a debt owed to or recoverable by a spouse, former spouse, or child of the debtor … in the nature of alimony, maintenance, or support of such spouse, former spouse, or child of the debtor without regard to whether such debt is expressly so designated … established by a court order or separation agreement, divorce decree, or property settlement agreement … and not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse or child of the debtor.3
The language of “owed to or recoverable by a spouse [or] former spouse” and “in the nature of . . . support” truly expand what can be defined as a domestic support obligation.4
Practically any debt owed to or recoverable by a spouse can qualify as a domestic support obligation, provided it is in the nature of support.
Another modification makes nondischargeable any debt “to a spouse, former spouse, or child of the debtor and not of the kind described under ‘domestic support obligations’ that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree, or other order of a court of record.”5
Prior to BAPCPA, the law required the court to determine if the debtor could afford to pay the obligation and whether the discharge of the debt would yield a benefit to the debtor that would outweigh the detriment to the former spouse or child of the debtor.6
Now, all debts owed to the spouse, former spouse, or child of the debtor are nondischargeable, regardless of the debtor’s ability to pay, or the benefit to the debtor.7 At this time, any debt or obligation falling under 11 U.S.C. § 523(a)(15) is nondischargeable.8
The changes to the BAPCPA are seemingly straight forward, but when challenged, inconsistency among the jurisdictions has persisted. And, the scope of the revised provisions was recently tested in the Eastern District of Wisconsin in Zimmermann v. Hying.
The Hying Decision
Attorney Karen Zimmermann represented Martin Hying’s spouse in their divorce proceeding, which was finalized in 2008. Thereafter, Martin and his former spouse became “embroiled in a series of hotly contested contempt proceedings” relating to court orders involving their child.9
As a result of these proceedings, the court sanctioned Martin for willful contempt and engaging in overtrial, ordering him to pay his former spouse’s attorney fees directly to the attorney.
Martin attempted to discharge the fees owed to the attorney, who retained bankruptcy counsel, as part of his Chapter 7 bankruptcy.
The appointed bankruptcy trustee opined that the fees owed to the attorney were not in the nature of a domestic support obligation. The trustee contended that she found no indication the fees specifically related to the child; rather, the fees were awarded for overtrial.
This resulted in an adversary proceeding requesting a judicial determination as to the dischargeability of the fees owed to the attorney.
The attorney argued the debt owed to her qualified as a domestic support obligation evidenced by the family court transcripts under 11 U.S.C. 523(a)(5) and the obligation also constituted a nondischargeable debt under section of 11 U.S.C. 523(a)(15).
In response, Martin argued that the obligation to pay the attorney was not a domestic support obligation, because the debt was not owed to a spouse, former spouse, or child of the debtor.
Martin also argued that the obligation was not in the nature of support for his former spouse or child, to which the appointed trustee agreed. Martin never directly addressed the argument that the debt was nondischargeable under 11 U.S.C. 523(a)(15).
However, Martin argued that no harm would be suffered by his former spouse or the attorney if these debts were discharged, which may have been relevant prior to the BAPCPA of 2005.
The bankruptcy court, Judge James Shapiro, held that payment of attorney fees was a domestic support obligation. Judge Shapiro found that even though the obligation was owed to a third party and not Martin’s former spouse, it was recoverable by a former spouse.
And, even though the fees were sanctions for willful contempt and overtrial, the obligation was in the nature of support, Judge Shapiro held, citing to court transcripts and the findings and orders of the family court in determining that the award did specifically relate to the child.
Judge Shapiro further determined that even if the debt was not a domestic support obligation, it was nevertheless nondischargeable under 11 U.S.C. § 523(a)(15).
The Lessons of Hying
Numerous conclusions may be drawn from Hying. First, the revisions of 11 U.S.C. § 523(a)(5) are being broadly construed in the Eastern District of Wisconsin. This section of the Bankruptcy Code is specific and does state that the debt can be “recoverable” by the former spouse to qualify under that section. The obligation in Hying was not owed to a former spouse.
Also, the obligation arose out of a post-judgment contempt proceeding and not the initial divorce proceeding or decree. Nevertheless, the Eastern District of Wisconsin found it nondischargeable under 11 U.S.C. § 523(a)(15). However, it must be noted that these types of debts may be discharged in a Chapter 13 bankruptcy.10
Significantly, Hying determines that obligations to third parties can be domestic support obligations, provided that the obligations are recoverable by a former spouse, and are in the nature of support for the former spouse or debtor’s child. It is more advantageous for an obligation to be determined to be a domestic support obligation, since these cannot be discharged in a Chapter 13 bankruptcy and have priority status above other claims.
Another implication is that fines or sanctions for overtrial or contempt can be domestic support obligations. An obligation does not actually need to be financial support for a former spouse or child, but only in the nature of support.
If the family law practitioner can show that the former spouse or child receives some benefit from the obligation, it may be construed to be in the nature of support. But, if the obligation is purely a punitive sanction, an argument could be made that the obligation was not in the nature of support.11
An obligation or debt excepted from a bankruptcy discharge as a domestic support obligation provides the most protection for clients (and attorneys) with regards to fees. It is important to relate an award of attorney fees back to the financial support of the former spouse. If it is necessary for your client to incur the legal fees for their welfare or their child’s, the obligation of the debtor to pay those legal fees should qualify as a domestic support obligation.
In Hying, the bankruptcy court looked to the rulings and findings of the family court. The family court clearly articulated what necessitated these fees being awarded, which made it easier for the bankruptcy court to make a determination as to whether they qualified as a bona fide domestic support obligation. Requesting attorney fees without stating why may diminish the chances that the fees can be found as support obligations.
Conclusion
Family law and bankruptcy law are converging more frequently. Family lawyers should understand how potential bankruptcies will affect marital settlement agreements, findings of facts, and conclusions of law. Hying demonstrates that the standard language used in many Marital Support Agreements to label an item a domestic support obligation may be insufficient to qualify as domestic support in bankruptcy court.
Similarly, failure to label an item as domestic support does not mean it is not. Rather, the actual facts and purpose of the obligation must be in the spirit of a domestic support obligation as articulated by the bankruptcy code.
About the Author
Nathan Zimmermann, Marquette 2010, is an associate in Bayside, Wisconsin, and practices in the areas of bankruptcy and family law.
This article is adapted from the May 2012 State Bar Wisconsin Journal of Family Law, published by the Family Law Section. The State Bar offers its members the opportunity to network with other lawyers who share a common interest through its 26 sections. Section membership includes access to newsletters, email lists to facilitate information sharing, and other resources.
Endnotes
