Imagine a world in which creditors could collect from debtors at will and without rules. It would be chaos, literally. Hypothetically speaking, if I know Pete owes me 10k and I know that Pete’s business is teetering on the brink of financial ruin, and there are no rules, what am I going to do? I tell you what I am going to do. I am going to secretly find out what assets Pete owns and then I am going to quickly assert control over those assets so I can get paid my 10k plus costs. I want to do this before any of Pete’s other creditors get wind of Pete’s financial condition and take his assets- before I can get paid.
Do you see what happens? The creditors “in the know” have a distinct advantage over the creditors who have no knowledge of Pete’s condition. The creditors who know the financial condition of the debtors get paid and those that don’t, either will not get paid at all, or will get paid based on the scraps left over. Besides, for the debtor, an overly aggressive creditor can shut your business down without having a complete understanding of your financial condition.
The Bankruptcy's Automatic Stay Stops Creditors, Lawsuits and Collections
Title 11 Of The United States Code is meant to create certainty out of chaos. The filing of a bankruptcy triggers certain legal protections for the debtor. A debtor who files a Chapter 7 Bankruptcy or Chapter 13 Bankruptcy is entitled to the protections under Section 362 of the Bankruptcy Code. Section 362 of the Bankruptcy Code addresses a legal protection known as the “Automatic Stay.”
I think a useful analogy for the “Automatic Stay” can be found in sports. When a sport’s team calls a “time out,” all play stops and the team usually convenes to create a strategy for continued play. So it is with a bankruptcy filing as well. When a debtor files for bankruptcy protection, Section 362 of the Bankruptcy Code protects the debtor from his creditors thus calling sort of a “time out” to let the debtor regroup and to prevent creditors making a “run” on the debtor’s remaining assets.
Section 362 bars pre- petition creditors from collecting from debtors in a variety of ways. Creditors are barred from collecting any pre-petition debts by garnishing wages, levying bank accounts, seizing the debtor’s assets, or offsetting the debtor’s bank accounts etc. But, how does the automatic stay work with divorce proceedings? How does the automatic stay work with child support enforcement? Can you still try and establish paternity if the father/debtor files a bankruptcy in Minnesota?
The Interplay Between Family Law, Bankruptcy & Divorce in RosevilleSection 362(b) states that the filing of a bankruptcy petition does not operate as a stay against certain proceedings. Section 362(b)(2)(A) states that a bankruptcy filing does not operate as a stay against the commencement or continuation of a civil action or proceeding to;
- (I) for the establishment of paternity,
- (ii) for the establishment or modification of an order for domestic support obligations (child support or alimony),
- (iii) concerning child custody or visitation,
- (iv) for the dissolution of marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate,
- (v) regarding domestic violence.
From this we can surmise that certain events are not barred by the automatic stay provisions of the bankruptcy code. Congress has said look, we know you have overwhelming debt, but if you file a bankruptcy, certain acts will not be barred by the automatic stay. So, if you are a Divorce Lawyer in Minnesota, the above is good to know. Your divorce client does not want to be running afoul of federal bankruptcy law- the penalties for violating the stay can be steep.
Section 362(b)(2)(A)(iv) Of The Bankruptcy Code
But, divorce lawyers in Minnesota- look out for Section 362(b)(2)(A)(iv). Notice that a bankruptcy filing does not bar the dissolution of marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate.......
Oh boy, what does that mean, right? Section 541 Of The Bankruptcy Code defines what property of the estate. Section 541(a) states that the commencement of a case creates an “estate.” Such estate is comprised of all assets wherever located and by whomever held. Basically, the bankruptcy estate consists of all assets that the debtor has a legal or equitable interest in. This is very broad and encompasses just about everything you can imagine. With few exceptions the assets we speak of - that belong to the estate, are determined on the date the bankruptcy was filed.
Property Of The Bankruptcy Estate
Section 541(a)(5) of the Bankruptcy Code states that there are two primary exceptions to this rule. First, if a person passes away within six months from the time the bankruptcy is filed, giving the debtor the possibility of inheriting money, then that money is part of the bankruptcy estate. Note, it does not matter when the money is received, it only matters that the individual passed away within six months of filing the bankruptcy. Second, if there is a divorce that is pending at the time the bankruptcy is filed, any asset the debtor acquires in the divorce is an asset of the bankruptcy estate.
On the second point, would it make sense to wait to commence the dissolution until after the bankruptcy has been filed? I suppose it depends right? If your client is the client who needs to file a bankruptcy, it seems to me that filing the bankruptcy first makes the most sense. However, every case is different and needs to be analyzed separately to determine the proper timing of the bankruptcy filing. Regardless, the point is that once a divorce has been commenced, the filing of a bankruptcy will make any settlement a possible asset of the Chapter 7 or Chapter 13 Bankruptcy estate.
Where does this get us in the analysis of whether a bankruptcy filing bars a dissolution proceeding from continuing? We already know that the automatic stay provisions of the Bankruptcy Code do not stay the commencement or continuation of an action for the establishment of paternity, establishment or modification of child support or alimony, actions for child custody or visitation, actions for domestic violence, and for dissolution of marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate......
We have already learned that the filing of a chapter 7 or chapter 13 bankruptcy creates an estate. Property of the estate is extremely broad and encompasses just about everything the debtor owns or could own.
Can Bankruptcy Be Used To Stop Divorce Proceedings?
It seems to me that if a divorce proceeding seeks to divide any of the debtor’s assets, in any way, than the divorce proceeding is stayed to the extent it is trying to divide the debtor’s assets. Not ceasing the divorce proceeding, to the extent that such proceeding seeks to determine the division of property that is property of the estate, would risk violating the automatic stay provisions of the Bankruptcy Code and exposing your client to possibly significant damages and sanctions.
Bankruptcy Exemptions And What Assets Can Be Protected
Debtors are certainly able to exempt some of their assets but occasionally debtors do not have exemptions for all of their assets. Section 522 Of The Bankruptcy Code provides a list of exemptions the debtor can use to exempt their assets. Bankruptcy Rule 4003 provides that the trustee has 30 days after the 341 meeting is concluded to object to the debtor’s exemptions. Failure of the trustee to object to the debtor’s exemptions reverts the property of the estate back to the debtor. In English, the filing of a bankruptcy case places all the debtor’s assets into the estate. Failure of the trustee to timely file an objection to the debtor’s exemptions, reverts the property back out of the estate and back to the debtor.
As to non- exempt assets, the Chapter 7 Trustee has up to two years to administer the Chapter 7 Bankruptcy estate. Every case is unique but if you represent a spouse whose spouse has filed a Chapter 7 or Chapter 13 Bankruptcy and the spouse who has filed the bankruptcy has substantial assets, there is a good chance that the spouse who has filed the bankruptcy will have assets that are non exempt and belong to the bankruptcy estate. If your client tries to exercise control over bankruptcy estate assets, they are violating the automatic stay provisions of the bankruptcy code and risk being sued for that violation either by the debtor or the trustee for damages and sanctions.
Bankruptcy or Divorce: What Comes First?
The cautious divorce lawyer will proceed slowly and deliberately when dealing with this scenario. For most routine Chapter 7 Bankruptcy cases, where the debtor’s assets are completely exempt, and the period for the trustee to object to the exemptions has passed, it seems to me the divorce proceeding can proceed since the assets are no longer assets of the bankruptcy estate. For the debtor/spouse who has assets that are more substantial, and possible non exempt, you will want to tread more carefully. It is never a mistake to call the Chapter 7 trustee or a Chapter 7 Bankruptcy Attorney to get some advice on how to proceed.
For example, let’s say Tony is Filing a Chapter 7 Bankruptcy in at the Kain & Scott Bankruptcy Law Firm. Let’s assume Tony owns his own chiropractic office in Roseville and also owns two non homestead condos’, one in Hawaii and the other in Florida. Tony has no debt against either condo, and the condo’s are worth 150k a piece. His chiropractic practice has no debt and has been valued by a business appraiser at 300k. You ask- what’s the problem? I am not sure it’s a problem more than an issue to be aware of. In this case, Tony’s chapter 7 bankruptcy estate owns the non exempt assets, Tony does not. The chapter 7 trustee’s duties require the trustee to liquidate Tony’s non exempt assets to pay Tony’s debts in full or pro rata.
If Tony’s wife, Lisa, files for divorce while Tony is in a Chapter 7 Bankruptcy, the automatic stay provisions of the bankruptcy code bar Lisa from trying to divide Tony’s non exempt assets since his non exempt assets will remain part of the Chapter 7 Bankruptcy estate. To proceed with that portion of the divorce wherein Lisa is trying to divide Tony’s non exempt assets, Lisa would need to bring a motion for relief from the automatic stay in bankruptcy court. The chapter 7 trustee is going to contest this motion since by federal bankruptcy law, the automatic stay bars Lisa from trying to divide the estate’s assets.
A Word OF Caution
If you are representing a spouse in bankruptcy or representing the spouse who is not in bankruptcy but the other side is in bankruptcy, stop immediately and think through the implications of all of this. As stated above, most chapter 7 bankruptcy cases are non exempt assets cases. In those cases, you may have to wait to proceed but you can proceed once the other spouse’s assets are no longer part of the bankruptcy estate.
For the rest of you, if you have a debtor/client or especially if you have a client whose spouse is in a bankruptcy and owns substantial assets, call a MN Bankruptcy Lawyer immediately or contact me directly at:
100 South Fifth Street #1900
Minneapolis, MN 55402
What MN Divorce Lawyers Should Know About Bankruptcy
And this is what you need to know about the automatic stay and divorce proceedings in Minnesota. If you have a bankruptcy issue, don’t ever hesitate to call an experienced bankruptcy law firm to advise you so you can avoid the common pitfalls. Clients certainly don’t understand the pitfalls and most bankruptcy attorneys do not either!
There are valid reasons for filing bankruptcy in Minnesota. When you have a divorce and a bankruptcy, it adds layers of complexity to the legal situation. This complexity can be carefully unraveled, but understanding that there is a legal issue to contend with is the first step. From the analysis above you now know when the automatic stay applies and when it does not.