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Los Angeles Bankruptcy Court Rules on Effect of Automatic Stay on Pending Divorce Case

The automatic stay in a bankruptcy proceeding is intended to freeze the bankruptcy estate at the moment the debtor files a petition in order to allow the bankruptcy trustee to deal with the estate’s property as efficiently as possible. By Kurtis Garbutt (http://www.flickr.com/photos/kjgarbutt/15420116119) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsFederal law excludes some proceedings and obligations from the automatic stay, however, for a variety of reasons. If a debtor is obligated to pay spousal maintenance or child support, or is involved in a legal proceeding in which those are at issue when a bankruptcy petition is filed, the automatic stay could negatively affect people who rely on the debtor for support. The automatic stay therefore does not apply to spousal maintenance and child support obligations. A divorce case usually involves more than just maintenance and support, however, so it can be difficult for bankruptcy courts to determine which parts of an order are subject to the automatic stay. A California district court recently addressed this issue in a dispute between a debtor and his soon-to-be ex-wife. In re Cohen, No. 2:14-cv-08939, civ. minutes (C.D. Cal., Oct. 5, 2015).

The Bankruptcy Code allows an exception to the automatic stay with regard to state court proceedings “for the establishment or modification of an order for domestic support obligations.” 11 U.S.C. § 362(b)(2)(A)(ii). Congress added this provision specifically to protect spouses, ex-spouses, and children of debtors from losing needed support during a bankruptcy proceeding. Bankruptcy courts also have rather wide discretion to determine whether or not a particular obligation in a divorce proceeding is a “domestic support obligation.” Federal bankruptcy law, rather than state family law, guides the court’s determination. Cohen at 8. As a result, a bankruptcy court may conclude that an agreement or order is not covered by the automatic stay under § 362(b)(2)(A)(ii), even if it does not specifically provide for spousal maintenance or child support, if the court concludes that a recipient needs support. Id.

The debtor’s wife (the “Wife”) filed a petition for divorce in Los Angeles County Superior Court in October 2008. The court signed and entered an agreed order (the “Order”) in March 2012, ordering the debtor (the “Husband”) to make monthly spousal and child support payments. The Husband filed for bankruptcy in June 2013, and the automatic stay halted many aspects of the divorce proceeding, including the division of property and the divorce itself. The parties agreed that most marital assets became the property of the bankruptcy estate.

In March 2014, the Wife filed a request in state court, asking it to clarify whether the Order was “in its entirety, intended to be in the nature of support.” Cohen at 2. She contended that the Order was primarily about support and was intended to be “adjusted based on the amount of income under the Debtor’s control.” Id. The Husband claimed that the Order primarily dealt with property distribution.

The Husband filed an adversary proceeding against the Wife in July 2014 for alleged violations of the automatic stay. The bankruptcy court granted his request for a preliminary injunction in August 2014, and the Wife appealed. The district court vacated the injunction and remanded the case, holding that the Order was principally related to “domestic support obligations,” and therefore it was not subject to the automatic stay.

Los Angeles bankruptcy attorney Devin Sawdayi has helped people find relief from financial distress through Chapter 7 and Chapter 13 bankruptcy cases since 1997. Contact us online, at (310) 475-9399, or at (800) 474-6050 today to schedule a free and confidential consultation with an experienced, knowledgeable, and compassionate financial advocate.

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Los Angeles Court Affirms Penalties for Willful Violation of Automatic Stay in Chapter 13 Bankruptcy Case, Los Angeles Bankruptcy Lawyer Blawg, September 18, 2015

Bankruptcy Court Considers Whether to Lift Automatic Stay for Foreclosure-Related Proceedings, Los Angeles Bankruptcy Lawyer Blawg, May 11, 2015

Photo credit: The Blue Diamond Gallery [CC BY-SA 3.0].