Attorneys Fees Ordered in Family Court and Discharge in Chapter 7 Bankruptcy

I have previously written how the bankruptcy courts deal with attempted discharge of the so-called domestic support obligations. However, that post focused primarily on discharge of obligation that arose as a result of divorce proceedings and child support. Occasionally, I see an attempt to discharge an obligation arising out of Family Court proceedings, specifically, attorneys fees.

While it is clear that the child support or spousal support obligations are not dischargeable in bankruptcy as domestic support obligations, the question of attorneys fees granted in a child support or other proceeding in Family Court was less clear cut until Ross v. Sperow, 57 A.D.3d 1255 (3rd Dept. 2008), where the Appellate Division, Third Department, held that the award of counsel fees by the Family Court was, in part, “in the nature of support” and, therefore, excepted from discharge in bankruptcy.

In Ross, the mother filed a petition for violation of a prior order of custody and visitation in 2005. In response, multiple cross petitions were filed by the father alleging violations by the mother and seeking modification of custody. In an August 2006 order resolving the parties’ petitions, Family Court sustained the mother’s motion for counsel fees and ordered that the father pay $ 5,000 of her counsel fees. The father subsequently filed for bankruptcy under chapter 7 of the Bankruptcy Code and, in Schedule F of his petition, he listed the award of counsel fees as an unsecured debt. The father was discharged by order of the Bankruptcy Court in January 2007 and, shortly thereafter, the mother commenced the present proceeding in Family Court for the violation of a court order based upon the father’s failure to pay the counsel fees. Contending that the debt had been discharged in bankruptcy, the father moved to dismiss the petition. Family Court, among other things, concluded that the counsel fees awarded in its prior order were a nondischargeable domestic support obligation, denied the father’s motion and granted the mother’s petition in part, finding the father to be in violation of a prior order.

The Appellate Division noted that state and federal courts have concurrent jurisdiction over the issue of the dischargeablity of a particular debt following the discharge of the debtor in bankruptcy. It reviewed the father’s contention that the counsel fees, although awarded in the context of a Family Court proceeding regarding custody and visitation, were not “in the nature of support” for the parties’ children. The Court held that since the mother’s initial petition commencing the proceeding clearly raised issues of financial need and hardship and her motion for counsel fees, which was sustained by Family Court in the August 2006 order, proposed consideration of her circumstances as one basis for an award of counsel fees. The Court held that the term “in the nature of support” is to be given a broad interpretation in the context of the discharge of debt obligations in bankruptcy and agreed with Family Court’s determination that the award of counsel fees in its prior order was, in part, “in the nature of support” and, therefore, excepted from discharge in bankruptcy.

The real issue in this case is whether the custody petition really was in the nature of support. The mother’s lawyer was able to persuade the both the Family Court and the Appellate Division that it was. While the Appellate Division relied on the award of attorneys’ fees and the relevant standard under the Family Court Act, an argument can be made that the Court should have looked to the underlying proceeding only and that proceeding dealt exclusively with custody issues. One of the factors in any award of attorneys’ fees is ability to pay, so that can make an award of attorneys fees in any proceeding in Family Court to be in the nature of support.

Basics of Bankruptcy Discharge and Domestic Support Obligations

On occasion, a divorce may result in one or both of the parties filing for bankruptcy, often without an adequate understanding of the limited relief available in the bankruptcy court. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) directly addressed issues related to the dischargeability of marital debt and support obligations, as well as to the effect of the automatic stay on collection and enforcement proceedings out of divorce and family law litigation.

Under bankruptcy law, a “domestic support obligation” is any debt incurred before or after a bankruptcy filing that is owed to or recoverable by a spouse, former spouse, child or governmental unit; in the nature of alimony, maintenance or support; and established pursuant to the terms of a divorce decree, separation agreement, property settlement agreement, court order or administrative determination.

In Chapter 7 bankruptcy, essentially all marital and domestic relations obligations are not dischargeable, regardless of whether they are support in nature, property divisions or “hold harmless” agreements, provided they were incurred by the debtor in the course of a matrimonial proceeding or a divorce action which resulted in a separation agreement, divorce decree, court order or administrative determination.

A debtor’s obligation to pay marital debts directly to a third party ( ie., pay the mortgage on former marital residence) and to hold the former spouse harmless on said debts is also deemed to be non-dischargeable if the obligation has the effect of providing support to the former spouse. A debtor’s duty to pay the following expenses are usually deemed to be in the nature of support and not dischargeable: educational expenses of a minor child; medical insurance coverage for a minor child; and life insurance, with the minor children as beneficiaries.

Attorney’s fees owed by debtor to his own lawyer are clearly dischargeable in bankruptcy, but as a general rule, attorney’s fees owed by debtor to a former spouse’s attorney are not dischargeable, if the underlying legal proceeding resulted in the entry of an order or judgment directing payment of maintenance or spousal support to the former spouse.

The division of a debtor’s pension benefits during the divorce action is usually accomplished by entering a Qualified Domestic Relations Order (“QDRO”). Since division of a pension is considered to be a transfer by debtor of a present interest in his pension, and as such, it is not a debt that can be discharged in bankruptcy.

In Chapter 13 bankruptcy, past due domestic support obligations owed by a debtor are not dischargeable, unless they are paid in full over the life of the Chapter 13 plan. However, if a debt created by a separation agreement or judgment of divorce is not in the nature of support, it sometimes can be discharged in Chapter 13 without being paid in full.

For a Chapter 13 Plan to be confirmed by the Bankruptcy Court, it must: pay in full to the former spouse all domestic support obligations owed by debtor at the time of the bankruptcy filing, and the debtor must be current on all domestic support obligations incurred after the bankruptcy filing.

A Chapter 13 Plan, even if confirmed by the bankruptcy court, is subject to dismissal if the debtor fails to pay any post-petition or post-confirmation domestic support obligations, and a Chapter 13 discharge will not be entered by the bankruptcy court unless and until a debtor certifies that all domestic support obligations have been paid and that the debtor is current on such obligations.

The automatic stay created by a bankruptcy filing bars the commencement or continuation of most legal proceedings, but it has no effect on a proceeding to establish paternity; to establish or modify a child support order, determine child custody or visitation issues, or dissolve a marriage, except to the extent that such proceeding may seek to determine a division of marital property in which the bankruptcy estate also has an interest. In those situations, the divorce can be granted without first obtaining relief from the automatic stay, but the marital property cannot be divided without obtaining such relief.

The automatic stay also does not prevent the post-petition collection of domestic support obligations such as alimony or child support from any property belonging to the debtor, providing that the bankruptcy estate does not also have an interest in the same property; from automatic wage deduction orders created by a statute or judicial or administrative order; from the interception of debtor’s federal or state income tax refunds, or
from the withholding, suspension or restriction of a debtor’s driver’s license or professional or occupational license. Therefore, Bankruptcy Court does not offer much protection for someone seeking to avoid the domestic support obligations.

The above rules will apply to the proceedings in New York State courts. In Ross v. Sperow, 57 A.D.3d 1255 (3rd Dept. 2008), the Appellate Division had to address a situation where one of the parties was seeking to enforce a counsel fee award after the other party filed for bankruptcy. In Ross, multiple violation petitions had been filed by the parties over the course of several years. In August 2006, Family Court upheld mother’s motion for counsel fees and directed father to pay $5,000 of the mother’s counsel fees. Father filed for a Chapter 7 bankruptcy thereafter, and listed the award of counsel fees as an unsecured debt. Father’s bankruptcy was discharged in January 2007. Mother brought a violation petition which alleged that father failed to pay the counsel fees. Father moved to dismiss petition on ground that he discharged counsel fee award in bankruptcy. The Appellate Division stated that state and federal courts have concurrent jurisdiction over issue of dischargabilityof a particular debt and held that domestic support obligations in the nature of support are exempt from discharge in bankruptcy. While father contended that counsel fees incurred were for custody and visitation proceeding, the record reveals that mother’s initial petition commencing the proceeding raised issues of financial need and hardship. According to the Appellate Division, term “in the nature of support” is broadly interpreted in the context of discharge of debt obligations in bankruptcy and held that the award of counsel fees was in part in the nature of support, and as such, exempt from discharge in bankruptcy.