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Where Bankruptcy and Family Law Collide in Texas

It is not uncommon to find within a divorce that there are financial issues affecting a family. Those financial problems, depending on their extent, could lead to filing for bankruptcy either by one or both spouses. Divorce is frequently the precursor to filing for bankruptcy. Consumer debt is an added factor that can put many families like yours over the top in terms of not being able to manage their relational, familial and financial stressors. If this situation sounds like the one you find yourself in then you will want to pay attention to the information contained in today’s blog post.

Once you or your spouse file for bankruptcy then an automatic stay is imitated by the bankruptcy court. This stay will bar any creditor from attempting to garnish your wages or collect money from you that would go towards payment of your debts. In order to proceed with your divorce under a bankruptcy stay, you would need to seek an order from the court that would temporarily lift the stay in order to deal with matters related to your divorce.

Issues such as initiating a paternity lawsuit, establishing child support or spousal maintenance orders are a few of the issues related to a divorce that deal with finances that would ordinarily not be allowed once a bankruptcy stay is initiated. However, you need to be aware that you cannot divide property that would be a part of the bankruptcy estate. Child custody, visitation of children, spousal support obligations and withholding of income for the purposes of paying child support of spousal support are allowed after a bankruptcy stay has been initiated.

How long does a bankruptcy stay remain in effect?

The bankruptcy stay will remain in place until the property in question is no longer a part of the estate or until the case is closed/dismissed. The stay would also be lifted if your case is discharged from the bankruptcy proceedings. A key impact that a divorce case would have on a bankruptcy case is that the determination of what is and what is not part of a bankruptcy estate relates to the division of your community estate in the divorce. Let’s walk through a hypothetical situation to show exactly why this is the case.

Take a situation where you and your spouse own property that is considered to be community property under Texas law. The question that you and your spouse would need to ask yourselves is to what degree does that property come into your bankruptcy estate and would the bankruptcy stay relate to that property. If your spouse attempts to divide that property in the divorce or tries to negotiate for that property, then it is likely that the stay would remain in place. Before doing anything in relation to that property within the divorce you should contact the bankruptcy court and attempt to have that stay lifted.

The stay would be lifted if you can argue to the court that you have good cause to do so. In the situation involving a divorce, your argument would likely have to be that a state family court would be in a superior position to be able to determine the rights of you and your spouse to that particular piece of property. As long as your creditors would not be impacted it is possible that the stay would be lifted, and the property division allowed to proceed under your divorce case. The bottom line is that you do not need to have a stay lifted in order to get divorced, but if dividing up property is an issue then you do need to request to have that stay lifted.

Family law issues are usually reserved to state court jurisdiction. The bankruptcy court should not venture into the issues related to your divorce. They are simply not equipped to deal with the issues as well as your family court.

What actions could be done that are in violation of the bankruptcy stay?

It could happen that an action taken in response to an automatic stay being entered may render that action void or invalid. In some situations, the action would be void from the get-go meaning that whatever was done was held to be ineffective. However, in other circumstances the action done in relation to property affected by the stay could be effective if the stay is later lifted by the bankruptcy court. I would recommend that you speak to a bankruptcy attorney more this, however. You would need to tell the attorney your specific circumstances in order to make a decision one way or the other.

What interests of yours fall under the purview of the bankruptcy court?

Once your bankruptcy action is begun, all interests that you have in property are now relevant to the bankruptcy proceedings. This means that as of the date of the filing of your bankruptcy case all property of yours is subject to the automatic stay. This could include all debts that are owed to you, insurance rights that have not yet matured and any interests you have in money that is being held in a trust.

The bankruptcy court in your case would have jurisdiction over all issues related to property in your estate. The include the ability to determine which spouse has the right to certain pieces of property. While a bankruptcy court has the ability to divide property between you and your spouse it will usually decline to do so out of deference to your family court.

If you are married to the debtor spouse who has filed for bankruptcy, then you need to be aware that it is up to you to make the bankruptcy court aware of your interests. You can and should file a motion with the bankruptcy court to have the automatic stay lifted so that the state family court can proceed without hinderance. A key point to understand is that if your divorce lawsuit was filed before the bankruptcy and is pending then the family court no longer has jurisdiction over your estate’s property.

Issues related to community property and bankruptcy

The bankruptcy estate is comprised of all interests that you as the debtor and your spouse hold in the community estate at the time your bankruptcy was filed. Any property that is under your sole, equal or joint management at the time that your case is filed would become a part of your bankruptcy estate and can be held by the court for the benefit of your creditors.

What happens if you acquire property right before filing for bankruptcy?

Most property of your bankruptcy estate will be determined at the time your case is filed. Some property, however, that you acquire after the time that you file your bankruptcy will become a part of your bankruptcy estate. If you acquire property or become entitled to acquire property within 180 days of that filing then it will be a part of the bankruptcy estate.

How is income handled in relation to a divorce and bankruptcy?

Income on estate property are included as part of the bankruptcy estate. Your earned income is not part of the bankruptcy estate. In a community property state like Texas you have an interest in your spouse’s earned income. Child support and spousal support cannot be discharged in bankruptcy. This counts amounts of money owed as well as future obligations of support that you have been ordered to pay.

What factors will a court look to when determining whether an obligation actually counts as support? Whether the court has entered a maintenance award is one factor that a court would consider. If spousal maintenance is applied for but the request is denied then the financial obligation is not for support.

Next, the need for spousal or child support at the end of the divorce will be considered by a bankruptcy court. Your spouse’s age, their work skills, educational level and heath are all factors that will go into the analysis. The bankruptcy court will defer to the family court on how to characterize particular types of support. Many courts will look to ascertain your intent when creating an award of support in order to figure out if those payouts belong in the bankruptcy estate. Long marriages are more likely to entitle your spouse to being paid maintenance by you.

Considering the rights of creditors in connection with your divorce

Most aspects of a mediated settlement agreement between you and your spouse are seen to be negotiated in good faith and are not subject to scrutiny from a bankruptcy court. The issue would have been that you and your spouse could possibly collude to have property transferred out of your name and into your spouse’s. This would take it out of the hands of your creditors and have a potentially messy situation on your hands.

For instance, suppose it was alleged that you were depositing your paychecks into a bank account bearing the name of your spouse. This may seem like a situation that you all are concluding to keep money in your hands and outside of the hands of your creditors. However, if you have been depositing money this way for an extended period of time due to your not having a bank account of your own and the money was used to pay for ordinary expenses it would be difficult to argue that this was collusion.

What factors do you need to be mindful of in relation to a divorce?

When you are getting ready to have your family law attorney draft temporary orders or a final decree of divorce then you need to be aware that these orders can have an impact on your bankruptcy case down the line. Here is what you need to be aware of during a family law case that can make a difference later on in your bankruptcy case.

First, spousal maintenance and child support payments and any money that you owe to your spouse in regard to these issues are exempted from property of your bankruptcy estate. This means that creditors would not be able to tap these areas in order to be made whole for the debts that you owe to them.

Second, payments of spousal maintenance and child support can be deducted when it comes to a bankruptcy court determining what your disposable income is. Your income will not grow as a result of receiving these payments from an ex-spouse.

Third, you need to make sure that your attorney is clear when he distinguishes between spousal maintenance and payments on debt.

Finally- the bankruptcy trustee at the beginning of your case holds the same right as a party who holds a lien against any of your property within the bankruptcy estate. As a result, it is crucial that you make it known that any property that you own that is also subject to being named as part of the bankruptcy estate is clearly labeled as being exempt if in fact it is determined to be so. This will avoid any problems if the property should ultimately be transferred to the non-debtor spouse.

The last thing that I wanted to mention to you is that bankruptcy cases are bound by a stricter schedule than divorce cases. Divorce cases can be wrapped up rather quickly but can also last a rather long time depending on the circumstances of your case. Be sure that your attorneys for each case are working together to coordinate your cases in relation to any deadlines that are approaching.

Questions about family law? Contact the Law Office of Bryan Fagan

For all of your family law needs, I recommend that you contact the Law Office of Bryan Fagan. Our licensed family law attorneys work tirelessly on behalf our clients. We pride ourselves on being inside the courtrooms of the family courts across southeast Texas. Our attorneys offer free of charge consultations six days a week. These consultations allow you to have your questions answered and needs addressed by one of our licensed family law attorneys.

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