The number one goal of a chapter 7 bankruptcy in America is to provide the debtor(s) with a fresh start. The policy behind the “fresh start” theory can be understood best from a macro economic stand point. As a society, is it wise to have debtors bogged down in debt and unable to spend money? We have answered this question, as a nation, as absolutely not. Why? For two reasons; One, if you have no money, and we allow creditors to cannibalize what little money you have left, you will need to seek out financial assistance from the county, who relies on the state, who relies on all of us tax payers to pay your bills. Second, do people bogged down in debt spend money? No- they do not. When they don’t spend money, they don’t buy good and services that keep other people employed. That is not good for America.
Adding to the above, we want people taking risks and starting businesses. Why? Because when those businesses succeed, they employ people, who then turn around and spend money on goods and services which is good for the economy. The flip side is many businesses will not succeed. However, we allow those people to discharge their debts in bankruptcy and thank them for the try!
Toward the goal of providing the debtor with a fresh start in bankruptcy, unsecured debts like medical bills, credit cards, unsecured loans, pay day loans, and past rent are all discharged in a bankruptcy case. Discharged means that the debtor’s liability for the debts are eliminated upon discharge.
The vast majority of debt that can be incurred by a debtor can be discharged in a bankruptcy case. However, Congress has carved out certain areas and said look, even though we want to provide debtor’s with a fresh start, there are reasons why we don’t want to allow debtors to discharge unsecured debts. According to Congress, there are some debts, that for specific policy reasons, should not be dischargeable in bankruptcy.
Section 523 of the Bankruptcy Code identifies some of these debts. While there are exceptions to these, taxes and student loans are not dischargeable. Child support and alimony are also not dischargeable in bankruptcy. No one has to object, these categories are simply categories of debts that are not dischargeable in bankruptcy- no one has to say or do anything- no objection is needed.
Section 523(a) of the Bankruptcy Code states, “A Discharge .........does not discharge an individual debtor from any debt..." (5) for a domestic support obligation;
Section 101(14A) of the Bankruptcy Code defines “Domestic Support Obligation.” Under 101(14A) the term “Domestic Support Obligation” means a debt that accrues before, on, or after the date of the order for relief in a case under this title... that is:
(A) owed to recoverable by-
(I) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or
(ii) a governmental unit;
(B) in the nature of alimony, maintenance, or support...of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;
(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of-
(I) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable non-bankruptcy law by a governmental unit; and
Some divorce attorneys have argued that their fees are in the nature of support and therefore, under 523(a)(5), their fees are not dischargeable as a domestic support obligation. However, when you look at how the bankruptcy code defines domestic support obligation, it quickly becomes apparent that even though a divorce attorney’s fees may meet (B) and (C) they don’t meet the first prong- (A) which requires the recipient to be a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative or a governmental unit. So any hope of bringing a 523 action against the debtor in bankruptcy hoping to have your fees held non dischargeable because they are in the nature of support or alimony is doomed from the start under 523(a)(5)(A).
However, in 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (also know as BAPCA or as some refer to it- BAPCRAPPA). In this act Congress expanded Section 523(a)(15) to emphasize the national importance of protecting dependent women and children in particular through means other than merely child support and alimony, by expanding the non dischargeability of debts incurred in family court proceedings. The reason for this seems to stem from the idea that the older concepts of child support and alimony were not enough to protect dependent women and children in particular.
Congress’s expansion of Section 523(a)(15) was an explicit admission that excepting from discharge debts incurred in particular family court proceedings and the enforcement of those debts was more important than the debtor’s right to a “fresh start.”
Stated simply, Section 523(a)(15) denies discharge of any debt- “to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) 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, or a determination made in accordance with State or territorial law by a governmental unit”;
What would not otherwise be dischargeable under 523(a)(5) is now non-dischargeable under 523(a)(15). Debts that a party to a divorce agreed to pay or was court ordered to pay is now not dischargeable in a chapter 7 bankruptcy proceeding. Property settlements a divorced party agreed to pay or was court ordered to pay is not dischargeable. Most importantly for Minnesota divorce attorneys is whether any attorney fees the other party agreed to pay or was court ordered to pay is also not dischargeable in a chapter 7!
However, the exception to discharge is limited to the spouse, former spouse, or child of the debtor. So hypothetically speaking, if in the divorce decree, let's say a guy named Jay is supposed to pay the joint debt owed to Bank of America for 10k. However, he does not pay it and instead filed bankruptcy on it. Bank of America cannot pursue Jay for his liability on the debt, but his ex-spouse could to the extent she paid the debt owed by her ex-husband Jay, that he was ordered or agreed to pay in the divorce.
So, can you change the wording of a divorce decree to include verbiage that the attorneys fees are considered child support or alimony and therefore not dischargeable in bankruptcy? Clearly, the answer is no.
However, can you include verbiage in the divorce agreement making the other party responsible for your divorce fees and enforce it? Yes! But, if the party responsible for paying your fees does not pay them, and instead files a bankruptcy, your client will have to pay the fees and then sue the debtor for the money they spent on your fees.
Why is this? Because the debt that is not dischargeable is the debt that is owed to the spouse, or former spouse, or child not the attorney. So, to the extent that the debt is owed by your client but ordered to be paid by the ex-spouse, I don’t see the lawsuit for non payment against the attorney and the ex-spouse but the attorney and your client and then your client and the ex-spouse.
This begs an important question for the divorce attorney though. What happens to the fees owed by their own client if the client files for bankruptcy? Since the debt is owed to the attorney and not to a spouse or former spouse or a child of the debtor, the attorneys fees are discharged in the bankruptcy.
Well, this seems old fashioned but make clients pay as you go. Do not let clients get into you for a lot of money. This means waiting until a settlement comes in to pay your fees is a very risky strategy. Instead, if you think the client is a bankruptcy risk, make sure the client pays as you go.
In your negotiations, negotiate the other party to pay your attorney fees. As to your client, those fees are not dischargeable in a chapter 7 bankruptcy. If your client is forced to pay your fees because their ex-spouse filed chapter 7 bankruptcy, your client can sue the ex-spouse for the money. Presumably, the es-spouse would be easier to collect on since they filed a chapter 7 bankruptcy and have less debt.
In an abundance of caution, if your client files a bankruptcy, have your client sign a new retainer agreement for their obligation to you going forward. While you have an argument that your post petition fees are not dischargeable anyway, those fees would be based on a pre-petition contract for services that your client’s obligations on are eliminated by the bankruptcy discharge.
Better to be safe than sorry. Have your client sign a new retainer agreement for post petition services.
One of the biggest ways to protect yourself from losing your hard earned attorney fees is to make sure you assess the parties asset and debts carefully before getting too far into the dissolution. This seems so simple and quite frankly it is. Once you have assessed the risk/need for a bankruptcy, have your client file a bankruptcy before the divorce is finalized. If both parties file bankruptcy, it takes the parties debts off the table and increases your chances of getting paid. Let’s be clear, the client should only file a bankruptcy if they need to file a bankruptcy- not to protect you getting paid.
However, as a bankruptcy attorney, I often meet with divorced parties that should have filed bankruptcy as part of the process of a divorce. It would have simplified their divorce and cleared up the debts permanently so the parties are not still hitched together by joint debts. Too often we see parties avoiding the “b” word only to file down the road anyway. If we are talking about getting both parties a fresh start to a new life, often times, a bankruptcy will be part of that equation.
Like taking medication for an infection, a bankruptcy is often the medication the parties need to resolve a financially devastating situation. Don’t be afraid to contact my MN Bankruptcy Lawyers to discuss your client’s particular situation. Most of us are more than happy to discuss what your client(s) is facing and what makes sense.
At Kain & Scott we often meet with the divorce lawyer and their client to navigate the bankruptcy and divorce waters together. In the end, divorce lawyers should get paid for the services they provide their divorce clients. We hope this article has been helpful in achieving that goal.