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  1. 1. Page 1 1 of 1 DOCUMENT Collier Family Law and the Bankruptcy Code Copyright 2008, Matthew Bender & Company, Inc., a member of the LexisNexis Group. CHAPTER 9 Effects of Bankruptcy on Nonmarital Family Relationships 1-9 Collier Family Law and the Bankruptcy Code P 9.50 P 9.50 Checklist: Planning and Practice Strategies. [1] For the Debtor/Obligor. Determine whether the provisions of the 2005 Act apply. Most provisions apply to cases filed on or after October 17, 2005. If the debtor has potential obligations for support of a child born out of wedlock of which he is al- legedly the father, consider the bankruptcy ramifications of different ways of dealing with the problem. A settlement without an admission of paternity or court order may be preferable for the debtor for a vari- ety of reasons, including possible bankruptcy dischargeability should the debtor later be unable to pay.n1 In a chapter 13 case, keep in mind that debts in the nature of prepetition child support are priority debts that must be paid in full under the plan unless the creditor agrees otherwise except in certain limit- ed circumstances.n2 But remember that these debts need not necessarily be paid at the same rate as pro- vided for in a state court order. When the debtor is liable for attorney's fees incurred by the opposing party in a custody or visitation case, or fees to a court-appointed guardian ad litem or expert, argue that those fees are not within the terms of the dischargeability exception for support since they were not incurred in a proceeding involv- ing support and, in the case of guardian and expert fees, are not owed to a spouse, former spouse, or child of the debtor or such child's parent, legal guardian, or responsible relative, or a governmental unit.n3 If the debtor is an obligor on an order for support arising from an annulled marriage consider argu- ing that the law has not changed since the pre-Bankruptcy Code cases holding that a party to a void mar- riage is not a spouse and, therefore, cannot be a former spouse within the scope of the dischargeability exception set forth in section 523(a)(5).n4 In negotiating an agreement for support or property settlement arising out of an annulled marriage, be aware of the effects a security agreement or mortgage might have in a bankruptcy case in which the debt is otherwise dischargeable.n5 In counseling a party to a nonmarital relationship, point out the advantages of having a written agreement spelling out the parties' rights and obligations to each other during the relationship and there- after, not only for bankruptcy purposes but also for tax purposes and for purposes of establishing those rights as a matter of contract.n6
  2. 2. To the extent possible, a potential obligor in an agreement between unmarried cohabitants should avoid parting with property interests in such an agreement if he or she wants to maximize the amount of property and flexibility retained in any later bankruptcy case.n7 Be aware that obligations of support to unmarried cohabitants are probably dischargeable in bankruptcy, unless fraud or willful and malicious acts were involved.n8 If the debtor wants to assure that a transfer to a past or present unmarried cohabitant is not avoided as a fraudulent conveyance, there should be documentation of the consideration for the transfer.n9 When the debtor was a party to a property settlement or support agreement with a former unmarried cohabitant, consider the possibility of recovery as a preference of any payment made pursuant to the agreement during the 90 days before the bankruptcy petition was filed, which could allow the debtor, debtor in possession or trustee to recover the property transferred.n10 Remember that any support obligations to persons other than a spouse, former spouse, or child of the debtor or such child's parent, legal guardian, or responsible relative, or a governmental unit, are normally dischargeable in a bankruptcy case. However, nothing prevents the debtor from honoring such obliga- tions, if he or she wishes to do so, after bankruptcy.n11 To protect property that a client wishes to devote to the support of a person other than a spouse or child who is unable to fully support himself or herself, consider establishing a trust for the purpose of support. Property of the trust would normally not become property of the bankruptcy estate of the grantor, as long as no fraudulent conveyance was made to the trust.n12 [2] For the Nondebtor/Obligee. Determine whether the provisions of the 2005 Act apply. Most provisions apply to cases filed on or after October 17, 2005. In pursuing or resolving a claim for support of a child born out of wedlock, avoid entering into a set- tlement that could be dischargeable in the defendant's subsequent bankruptcy. Be sure to include an ad- mission of paternity and have the settlement incorporated in a court order or other determination of a governmental unit charged with setting paternity obligations.n13 If the debtor has agreed to a court order to pay support, but has not admitted paternity, be prepared to present evidence on the issue of paternity in a dischargeability proceeding. The Bankruptcy Code ex- cepts from discharge a court order for support of the debtor's child, but does not require that the court or- der include a finding of paternity. If a court order for support exists, it should be possible to base a deter- mination of nondischargeability on a later finding of paternity, including one in the dischargeability pro- ceeding itself.n14 If an agreement, but no court order, for support of a child born out of wedlock exists, argue that the debt is nondischargeable, nonetheless, because if the Bankruptcy Code dictated otherwise it would be un- constitutional. The court may be persuaded either to interpret the Code broadly in a way that avoids con- stitutional problems by including agreements for support of illegitimate children in section 523(a)(5) or it may find that the exclusion of such agreements is unconstitutional.n15 Argue that amounts ordered to be paid for attorney's fees, prenatal and maternity care, and other pa- ternity related expenses such as blood tests should all be nondischargeable, since they all had the func- tion of providing support necessary for the debtor's child's health and well-being. Argue also that the obligation to make these payments is one owed to the debtor's child or such child's parent, legal guardian,
  3. 3. Page 3 or responsible relative, or a governmental unit.n16 In accepting a lump sum settlement of a paternity obligation, especially if the settlement is for an an- tecedent claim, bear in mind the possible avoidability of the payment as a preference if the payor files a bankruptcy case within one year thereafter.n17 If a preference action is brought to recover payments made for the support of a child born out of wedlock, argue that the payments are contemporaneous exchanges in satisfaction of current obligations rather than antecedent debts, or that they are payments of domestic support obligations. Remember that, in a case filed after the effective date of the 2005 amendments,n18 new defenses to preference avoidance have been created, including a complete defense with respect to all payments made to a child of the debtor pursuant to a domestic support obligation.n19 In a chapter 13 case, keep in mind that debts in the nature of prepetition child support that are not as- signed are priority debts that must be paid in full under the plan unless the creditor agrees otherwise ex- cept in certain limited circumstances.n20 Be sure to file a priority proof of claim for all such debts and to object to any plan that does not pay them in full unless satisfactory alternative arrangements have been negotiated. When possible, obtain a judicial finding that court ordered attorney's fees in a custody or visitation case are necessary for the support for the debtor's spouse, former spouse or child. Such a finding should enable the obligee to argue successfully that the debt is nondischargeable under section 523(a)(5)n21 and entitled to priority status and other protections enacted by the Bankruptcy Reform Act of 1994.n22 In representing a party who has served as a guardian ad litem or expert in a custody type of proceed- ing, argue that the fees awarded to the obligee were necessary to assure that the child's best interests were served and, therefore, were necessary for the support of the child.n23 If the obligee obtained a support order as the result of an annulment, be prepared to argue that the term ''former spouse'' in section 523(a)(5) was meant to broaden the scope of that section to include par- ties to annulled marriages. If possible, also argue that the obligee was a former spouse because the mar- riage was voidable, rather than void ab initio, and that, therefore, the obligee was legally the debtor's spouse for a period of time.n24 In negotiating an agreement for support or property settlement in connection with an annulment, at- tempt to obtain a nonavoidable security interest to secure all obligations to protect against possible dis- charge of those obligations in bankruptcy.n25 Any agreement between unmarried cohabitants, either during a relationship or after a separation, should be negotiated with bankruptcy, as well as possible creditors' claims against either partner, in mind. One possible way to protect against such possibilities is to agree that property interests will be owned by both partners or to divide property between them. Another is to create security interests in ex- change for the bona fide contributions, whether monetary or nonmonetary, of a partner who is dependent upon the other for support.n26 If a bankruptcy case is filed by a former partner in a nonmarital relationship who has agreed to pro- vide property or support, argue that section 523(a)(5) should be construed broadly to include such sup- port, but also consider theories of nondischargeability such as fraud or false pretenses. If a claim of nondischargeability is to be raised on these latter theories, be sure to file a complaint within the deadlines set by the Bankruptcy Rules.n27 In negotiating a separation agreement between former unmarried cohabitants, try to protect against possible avoidance actions in any subsequent bankruptcy case that might undo transfers of money or
  4. 4. property. Document, when possible, the present consideration for the transfers that would prevent them from being considered fraudulent transfers or preferences, unless a conscious decision is made to treat the transfers as gifts for tax purposes after considering the bankruptcy risks involved.n28 In a situation in which a person other than a spouse, former spouse or child is being provided sup- port, pursuant to a settlement, contract or otherwise, suggest a transfer of property or an establishment of a trust to provide the support to assure that the support can be continued without interruption during any subsequent bankruptcy of the payor.n29 FOOTNOTES: (n1)Footnote 1. See P 9.02[2] supra. See also Rutkin, Family Law and Practice, § 63.03[5], [6] (1991). (n2)Footnote 2. See P 8.04[3] supra. (n3)Footnote 3. See P 9.03 supra. (n4)Footnote 4. See P 9.04 supra. (n5)Footnote 5. See P 9.04 supra. (n6)Footnote 6. See P 9.05 supra. (n7)Footnote 7. See P 9.05 supra. (n8)Footnote 8. See P 9.05 supra. (n9)Footnote 9. See P 9.05 supra. (n10)Footnote 10. See P 9.05 supra. (n11)Footnote 11. See P 9.06 supra. See also 11 U.S.C. § 524(f). (n12)Footnote 12. See P 9.06 supra. (n13)Footnote 13. See P 9.02[2] supra. (n14)Footnote 14. See P 9.02[2] supra. (n15)Footnote 15. See P 9.02[1], [2] supra. (n16)Footnote 16. See P 9.02[2], [3] supra. (n17)Footnote 17. See P 9.02[4] supra. (n18)Footnote 18. Pub. L. No. 109-8 (2005), effective with respect to cases filed on or after October 17, 2005. (n19)Footnote 19. 11 U.S.C. §§ 547(c)(7), 550(c). (n20)Footnote 20. See P 8.04[2], [3] supra. (n21)Footnote 21. See P 9.03 supra. (n22)Footnote 22. Pub. L. No. 103-394 (effective with respect to cases filed on or after October 22, 1994), reprint- ed in Vol. E Collier on Bankruptcy, App. Pt. 9(a) (Matthew Bender 15th Ed. Revised). See P 9.02[1] supra. (n23)Footnote 23. See P 9.03 supra. (n24)Footnote 24. See P 9.04 supra. (n25)Footnote 25. See P 9.04 supra. (n26)Footnote 26. See P 9.05 supra. (n27)Footnote 27. See P 9.05 supra. See also P 6.08 supra. (n28)Footnote 28. See P 9.05 supra.
  5. 5. Page 5 (n29)Footnote 29. See P 9.06 supra.