What we know so far about domestic support obligations in bankruptcy is that they are non dischargeable and the bankruptcy court has the last word as to what is and is not support. But we just scratched the surface in looking at support when we considered obligations from one spouse to another. Debts owed to an extended cast of supporting characters may be “support” as well, non dischargeable and carrying a priority for payment. Supported party’s professionals While support to a former spouse may be a monthly obligation, don’t overlook family court orders that one spouse pay a fixed sum to the other party’s lawyer.  If based on need or disparity between the financial capacity of the spouses, that award of the other party’s attorneys fees  may be in the nature of support as well.  Anderson, 300 B.R. 831 (WD NY). You can expect that attorneys fees incurred to establish, modify, or collect support will themselves be found to be in the nature of support. Professionals appointed to represent the interests of minor children may have claims that are in the nature of support.  In Chang, the 9th Circuit held that the state court order requiring payment by the debtor to the child’s guardian ad litem was non dischargeable support, despite the fact that the statute on its face speaks of debts owed “to” a spouse or child.  The nature and purpose of the fees here were held to be a debt to the child.  Chang, 163 F.3d 1138 (9th Cir. 1998). Payments to other third parties Bankruptcy courts have found that judgments requiring payment by the debtor of obligations to third parties whose claim arose quite outside the divorce proceeding to be support: Mortgage payments:  debt service on the house the ex spouse lives in may be support.  Maitlen, 658 F.2d 466 (7th Cir. 1981). Payment of spouse’s debts:  obligation may be support despite label as “property settlement”.  Williams, 703 F.2d 1055 (8th Cir. 1983) Educational expenses of children: such obligation may be support even if the expenses will be incurred after the offspring reaches the age of majority.  Boyle, 724 F.2d 681 (8th Cir. 19840 Public benefits provided children  State’s claim to recover overpayment in aid to children held to be DSO; Anderson 439 BR 206.  watch also for govermental expenses for children in protective or punitive custody. Why the determination may not matter Having spent all this time working out whether a debt is support, and therefore non dischargeable, in many of your cases for a debtor in a no asset  Chapter 7 case, it doesn’t matter. Enter Section 523(a)(15), making non dischargeable debts  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; So, if the debt is incurred to (or “for the benefit of”  we can add in light of the case law) a spouse or child in the course of a separation or divorce, it isn’t dischargeable, regardless of its characterization. But, wait! wait!  There’s more: Section 523(a)(15) isn’t included in the debts not dischargeable in Chapter 13! So, the issue of whether an obligation is a domestic support obligation is chiefly important in Chapter 13, where it would be dischargeable without necessarily being paid in full, or, in a Chapter 7 asset case, where the non dischargeable support obligation might be paid in full or in part. With that, we’ll call it quits, and take up more about family law in bankruptcy cases another time. The Bankruptcy Family Law Series:  ♦ Spouses as source of Conflicts   ♦ Starting with support Image courtesy of Wikimedia.

The starting place for our exploration of bankruptcy and family law is support. Whether it’s called alimony, maintenance, or support, any amounts due at the commencement of a bankruptcy case are non dischargeable. Actually, since BAPCPA, it’s called a domestic support obligation.  It got a statutory definition, as well: (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, including interest…  that is— (A) owed to or 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 (including assistance provided by a governmental unit) 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 nonbankruptcy law by a governmental unit; and (D) not assigned to a nongovernmental entity…   §101(14A) Section 523(a)(5) makes a domestic support obligation non-dischargeable.  That message is echoed in §1328(a)(2). So, if it’s a domestic support obligation, it can’t be discharged. Is it really support Just when it looked simple, you need to acknowledge the power of the bankruptcy court to look past the labels that the former spouses or the family court attached to an obligation.  Those labels don’t necessarily control the characterization of a debt. For example, in Shaver, 274 F.2d 1314, the 9th Circuit upheld a Montana bankruptcy court dealing with a divorce decree entered in Indiana, by which the non debtor spouse got $197,000 payable over 10 years in satisfaction, said the decree, of the wife’s “marital and dower rights”.   Payments would end if the wife died during that 10 years.  Despite the label, it was non dischargeable support said the court. Likewise, the debtor’s divorce obligation to pay the taxes on the half of his military retirement benefits awarded to his wife of 31 years was likewise found to be in the nature of support when the debtor filed Chapter 13.  Denis, 25 F.3d 274. Even in the face of a state court denial of spousal support in a short term marriage, the 9th Circuit BAP found that the award to the non debtor spouse of  $185,000 in attorneys fees incurred in a custody battle to be in the nature of support.  Gionis, 170 B.R.  675. Bankruptcy courts will generally look at both the intent of the parties, the function the payments serve, and any events that terminate the obligation to pay, such as remarriage or death in determining if an obligation is support. No relief from existing order Clients sometimes appear with an old support order on which there is an outstanding balance.  Despite changes in the spouses’ relative prosperity since the order was made, your prospective client has not returned to family court to get relief from the support order. The client is unlikely to get relief from that order in bankruptcy court.  While bankruptcy courts are not constrained by collateral estoppel when it comes to the characterization of payments flowing (or not flowing) between ex spouses, the bankruptcy court will not typically revisit the amount of the periodic obligation. If such relief is necessary, it has to be obtained from the family court or the party to whom the support is now owed. Next time, we’ll look at the bankruptcy treatment of amounts owed to attorneys and other professionals as a result of proceedings in family court. Image:  Fotolia.com 

Rebuilding after bankruptcy is a process. It starts with not incurring any negative credit after such time you file for bankruptcy. For example, after your bankruptcy case is over, you want to make sure that you do not incur any negative credit items on your credit Bureau. This would include not falling behind on any+ Read MoreThe post How To Rebuild After Filing For Bankruptcy? appeared first on David M. Siegel.

Being a bankruptcy attorney is a unique situation.  It is one of the few areas of law where the attorney can actually assist the client and at the end of the service, the client is 100% pleased with how everything went. In most areas of law, whether it be contract law, divorce law, criminal law,+ Read MoreThe post Why I Love Being A Bankruptcy Attorney In Chicago appeared first on David M. Siegel.

If you are someone who is considering filing for bankruptcy, then the most important decision that you’re going to make in that process is deciding which attorney you are going to hire. In some cities, there are literally hundreds of bankruptcy attorneys that are advertising their services in directories, on the Internet, and newspapers. But+ Read MoreThe post Helpful Tips To Select A Bankruptcy Attorney appeared first on David M. Siegel.

Since 1991, David Siegel has been helping people get out of debt in Chicago and in the suburbs. Over 75% of prior bankruptcy clients filed a chapter 7 bankruptcy. Chapter 7 bankruptcy is also known as fresh start bankruptcy. It allows someone who has unsecured debts to gain a fresh start within a matter of+ Read MoreThe post Chicago Bankruptcy Attorney Has Helped Thousands, Since 1991 appeared first on David M. Siegel.

The answer depends on what is the situation in your life right now. You may be struggling with credit cards, medical bills, personal loans or any other type of debt. Sometimes you have creditors calling you on the phone, harassing you at work or just sending you letters making your life miserable. At other times,+ Read MoreThe post Will Filing For Chapter 7 Bankruptcy Save My Life? appeared first on David M. Siegel.

January 16, 2014 Noon PST Just when you think you’ve mastered the rules of the game, they change. Mark your calendar for January 16, 2014 (!) for an introduction to the new RESPA rules on mortgage servicing presented by John Rao of NCLC. There’s lots that new: new rules on Qualified Written Requests force-placed insurance who owns the note mortgage payment accounting Not only are there new rules, but there is a private right of action for your client. But only if you know what their rights are can you help enforce those rights Sign up The California Home Owners Bill of Rights Collaborative and NCLC have teamed up to present this webinar, which I note is labeled “Part I”. CLE credit is available and it’s free.  What could be better? Sign up here. Image courtesy of FreeClipArt.

Finding that 11 U.S.C. §329(b) limited the court to disgorgement of the actual amount received, the Fifth Circuit has reversed the most draconian penalties assessed against an attorney who represented a former chapter 13 debtor.   However, the portions of the case that were not appealed raise serious questions. The case is Baker v. Cage, No. 12-41125 (5thCir. 12/16/13), which can be found here. What HappenedJames Glen Whitley (Debtor or Whitley) filed a pro se chapter 13 bankruptcy in 2008 in an attempt to save his rental properties.  At the court’s urging, he engaged counsel.   The lawyer he hired was Reese Baker (Baker), an attorney who is board certified in both consumer and business bankruptcy.   During the 2008 case, Whitley paid Baker a retainer of $1,800.   Baker did not seek court approval for this payment and did not file a disclosure of compensation until much later.   Baker was not able to salvage the 2008 case and it was dismissed without objection on March 4, 2009.   After the case was dismissed, Baker filed a fee application but withdrew it after several parties objected.On April 6, 2009, Whitley paid Baker an additional $10,274.00 consisting of $10,000 to be applied against the fees from the 2008 case and $274.00 to pay the filing fee on the new case.   The next day, on April 7, 2009, Baker filed a second chapter 13 case for Whitley.   After Whitley unsuccessfully filed five plans, the 2009 case was dismissed with prejudice on July 20, 2009.This is where it gets interesting.   First, Baker moved for reconsideration on whether the dismissal should be with or without prejudice.  Second, on August 3, 2009, Baker filed a fee application.Third, on August 27, 2009, Whitley deeded two properties to an affiliate of Baker in partial payment of fees owed.    At the time the properties were transferred to Baker’s affiliate, they were posted for foreclosure.   On September 1, 2009, Baker’s agent appeared at the foreclosure sale and was the successful bidder for the properties.Fourth, on September 29, 2009, five months after the 2009 case was filed, Baker filed his disclosure of compensation for the 2009 case.    He did not disclose the transfer of the two properties.This set the stage for a hearing on October 6, 2009.   At the hearing, Baker attempted to withdraw both the motion for reconsideration and the fee application.   At this hearing, there was testimony about the transfer of the two properties.   Judge Wesley Steen vacated his prior order of dismissal and instead converted the case to chapter 7.   Lowell Cage was appointed as chapter 7 trustee.The Trustee filed an adversary proceeding against Baker.   However, Judge Steen denied a motion for summary judgment.At this point, Judge Steen retired and Judge Jeff Bohm took over the case.   On February 2, 2011, Judge Bohm issued a Show Cause Order to determine the reasonable value of the services provided by Baker pursuant to 11 U.S.C. Sec. 329(b).The Bankruptcy Court RulingThe Court held hearings on six days between April 8, 2011 and September 15, 2011.   By this time, Whitley had been sentenced to life in prison for sexual assault of a minor.   He also had his discharge denied.   On November 21, 2011, the Court released its opinion, which can be found here.   The Court found that Baker should disgorge all compensation received in the 2008 and 2009 cases because:  He did not file timely disclosures of compensation.He received a post-petition payment in the 2008 case without court approval.He failed to disclose “all connections that he, or any entity with which he is affiliated, had relating to any party in interest in the Debtor’s case.”He did not disclose transfer of the two properties.He did not provide an “identifiable, tangible and material the Debtor or the Chapter 13 estate.    That’s right, Judge Bohm applied Pro-Snax to fees in a chapter 13 case.Judge Bohm ordered Baker to return the money that he received from the Debtor in the amount of $12,074 and to transfer the two properties that he purchased at foreclosure to the estate.The Fifth Circuit RulingBaker did not appeal the ruling with respect to disgorgement of the monies received from the Debtor.   However, he did appeal the order requiring him to transfer the properties.   The Fifth Circuit reversed and remanded.    It found that the Court had ordered Baker to show cause why “any compensation previously paid” should be disgorged, but exceeded this remedy when it ordered that the properties be disgorged.  Because Baker had satisfied $98,775 in liens against the properties, the Court not only ordered disgorgement but an additional penalty of nearly one hundred thousand dollars.    The Fifth Circuit noted that the Bankruptcy Court did not address the payment of $98,775 in its order, did not value the properties at the time they were transferred and did not value them at the time that they were ordered returned.    Nevertheless, the Fifth Circuit did hold out the possibility that additional sanctions could be imposed if proper procedures were followed but cautioned that any sanction should be awarded with restraint and discretion.   The Court stated: The bankruptcy court has authority to impose disciplinary sanctions on attorneys beyond the return of compensation, but the amount of the sanction imposed is essential to a bankruptcy court’s sanction analysis because “[w]hen a court metes out a sanction, it must exercise such power with restraint and discretion.” (citation omitted). Although a $98,775 sanction may have been appropriate considering Baker’s conduct as adverted to in these proceedings (e.g. Baker’s “ill-gotten gains” and his “nasty habit of non-disclosure”), in order to ensure that a sanction is “chosen to employ the least possible power to the end proposed,” the bankruptcy court must in the first instance compare the sanction amount to the sanctioned party’s conduct. (citation omitted). Opinion, pp. 11-12.Lessons Learned The first lesson to be learned from this case, as in all bankruptcies, is DISCLOSE, DISCLOSE, DISCLOSE.  Baker got in trouble because he waited to file his disclosure of compensation until after the cases were dismissed.   The rules require that it be filed within fourteen days after the petition is filed.   While the information contained within the disclosure of compensation was apparently contained within the Statement of Financial Affairs, the attorney had an obligation to make his own disclosure in a required filing under his own signature.  Furthermore, when the case was reinstated, he should have amended his disclosure to reflect the properties transferred to him.  Making timely disclosure of compensation is an important practice point.  I have seen judges penalize attorneys who filed accurate but tardy disclosures under circumstances much less egregious than here.   Be forewarned that this judges and trustees can be expected to look carefully for attorney disclosures.The other unfortunate lesson that Mr. Baker learned was that it’s not over until it’s over.   After the 2009 case was dismissed with prejudice, the Court would have lost the ability to police post-dismissal payments to the attorney.   However, because Baker sought to temper the Court’s order by seeking reconsideration of the “with prejudice” aspect, the Court arguably retained jurisdiction and this allowed bad things to happen to him.   No doubt Baker viewed the properties as of no value to the debtor or the estate because of the pending foreclosure.   However, because the Court unwound its dismissal order, the properties arguably reverted to their status as property of the estate.    With the benefit of 20/20 hindsight, Baker either should not have sought reconsideration of the court’s order or should not have accepted property from his client.   Things That Are Sort of Disturbing About This CaseBesides the obvious, glaring problem that was corrected by the Fifth Circuit, there are several other aspects of this case which are disturbing to this author.   First, what authority did the Bankruptcy Court have to convert the case to chapter 7?   Baker filed a motion to reconsider whether the dismissal order should be with prejudice.   The Chapter 13 Trustee filed a response which contended that dismissal with prejudice was proper.    Prior to the hearing, Baker filed a Motion to Withdraw his Motion for Reconsideration.   Once Baker withdrew his motion and no other party had requested affirmative relief, there should not have been a live case or controversy for the Court to hear.   Nevertheless, the Court proceeded to conduct a hearing and enter relief.   In its ruling, the Court did not give any justification for the relief it was granting.   Thus, while I am willing to be proven wrong, it sure looks like the Court granted sua sponte relief in a situation where there was not a live controversy before it.   Next, what was Judge Bohm thinking when he referred to the obligation of a chapter 13 debtor’s attorney to disclose all connections?    The requirement to disclose connections is contained in Fed.R.Bankr.P. 2014(a).   This rule only applies to applications for employment of a professional by the bankruptcy estate.   A chapter 13 debtor’s lawyer is not a professional employed by the estate.    If you compare section 327 with section 330, you will notice that professionals employed by the estate must be formally employed while compensation may be awarded to estate professionals as well as debtor’s attorneys in cases under chapters 12 and 13.   The obvious conclusion is that chapter 12 and 13 debtor’s attorneys do not represent the estate and need not be employed.    Nevertheless, Judge Bohm cited chapter 11 case law for the proposition that the chapter 13 debtor’s attorney had an obligation to make the disclosures required by rule 2014(a).   I do not understand this ruling.Even More Cause for ConcernFinally, and most disturbingly, the Court applied the Pro-Snaxstandard to the debtor’s attorney in a chapter 13 case.    Although the order to show cause was issued under section 329(b), the Court applied section 330(a) to deny compensation.    This appears questionable since sections 329 and 330(a) are quite different sections.   Section 329 allows the court to examine “compensation paid or agreed to be paid” within one year before the filing of the case “in contemplation of or in connection with the case.”   The Court has the ability to order the return of compensation if “such compensation exceeds the reasonable value of such services.”    Section 329 serves two important purposes.   First, it is a consumer protection statute protecting clients from being overcharged by attorneys.   It also protects the interest of the creditors by ensuring that debtors do not transfer property to their attorney to keep it out of the estate.   The legislative history to section 329 expresses this purpose: Payments to a debtor's attorney provide serious potential for evasion of creditor protection provisions of the bankruptcy laws, and serious potential for overreaching by the debtor's attorney, and should be subject to careful scrutiny.On the other hand, section 330 allows compensation to “officers” of the estate for services provided during the bankruptcy.    The statute allows compensation to attorneys representing individual chapter 12 and 13 debtors for “representing the interests of the debtor in connection with the bankruptcy case.”     The standard for allowing compensation to officers of the estate is “reasonable compensation for actual, necessary services,” while the standard for chapter 12 and 13 debtor’s attorneys is “reasonable compensation . . . based on a consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section.”In addition to these more general statements, section 330 includes six factors to be included in awarding compensation and two factors to be considered in denying compensation.   See 11 U.S.C. Sec. 330(a)(3) and (4).   To further complicate things, the Fifth Circuit has added a judicial gloss (which may or may not contradict the statutory language as well as other language within the opinion) requiring that any services provide an “identifiable, tangible and material benefit.”   Matter of Pro-Snax Distributors, Inc., 157 F.3d 414 (5th Cir. 1998).     Following chapter 11 case law, Judge Bohm found that in order to be compensable, services had to be reasonable at the time they were rendered and result in an identifiable, tangible and material benefit.    Judge Bohm found that the services “were probably necessary to the administration of the Debtor’s case at the time that Baker rendered the services.”   Opinion, p. 16.   However, he found that Baker failed to meet the benefit test. Turning to the retroactive analysis, the Court concludes that Baker's services did not result in an identifiable, tangible, and material benefit to the Debtor's interest. None of the plans that Baker proposed were confirmed, [Finding of Fact No.7]; nor did the Debtor retain any properties. See [Finding of Fact No. 13]. Baker presented no evidence of any result beneficial to the Debtor or-for that matter-to the estate. Baker's services did nothing other than delay foreclosure on the properties owned by the Debtor. Moreover, the Debtor failed to receive his discharge. [Finding of Fact No. 12]. It is therefore no understatement to conclude that Baker's services rendered absolutely no benefit to the Debtor, which is exactly what the Debtor said in his testimony.  Opinion, p. 16.I have three problems with this ruling.   (Keep in mind that as the author of a blog, my opinions carry no weight beyond whether anyone finds them persuasive.  When I take issue with an opinion, as I have done here, it is meant to encourage discussion among those who care about these issues.   However, it is important to remember that the opinions of Judge Bohm and his colleagues have the force of law and mine do not).First, section 330(a) does not apply to services rendered pre-petition; that is what section 329 is for.   Section 329(b) incorporates a reasonable value standard which presumably refers to what is reasonable in the marketplace.  It does not incorporate section 330(a) or the Pro-Snax gloss.Second, Pro-Snax is a dubious and controversial decision.   Section 330(a)(3)(C) provides that the Court may consider whether services were beneficial “at the time” they were rendered.   Section 330(a)(4)(a)(ii)(I) provides that the Court may deny compensation for services that were “not reasonably likely to benefit the debtor’s estate.”  As a result, Pro-Snax appears to add a new requirement beyond what Congress required.   Additionally, the Pro-Snax case itself referred to identifiable, tangible and material in one place and reasonably likely to result in a benefit in another.   So which is it?  Is it the standard in the statute or something more?  Given Pro-Snax’s dubious provenance, courts would do well to limit it to its original context of chapter 11 fees.Finally, even the cases that scrupulously follow Pro-Snaxallow compensation for those services which the attorney is required to perform under the Code.    I have not seen any other case that says that you get nothing because the case turned out badly.Hard Facts Make Bad Law (A Personal Rant)It is very clear that Judge Bohm did not like the way that the attorney handled this case.   His disclosures were untimely and omitted important details.   He also invited trouble by dealing in his client’s property.    There is also the very human tendency to taint the attorney with the fact that his client went to prison for life and lost his discharge.    However, Judge Bohm did not limit his opinion to holding that attorneys who fail to make timely and accurate disclosures while representing child abusers should forfeit their compensation.   He relied on Pro-Snax to rule that if a chapter 13 case does not succeed, the attorney may not receive any additional compensation and must return all compensation received in that case and prior cases.    Considering that close to two-thirds of chapter 13 cases fail, this ruling amounts to declaring open season on chapter 13 debtor’s attorneys.   Think about that for a moment.   If this case is carried to its logical conclusion, then chapter 13 debtor’s lawyers should receive no compensation whatsoever for 67% of their cases.  In my mind, the high rate of failure in chapter 13 cases is an important distinction from the chapter 11 case which gave birth to Pro-Snax. Why would any competent lawyer practice under such a regime?The danger inherent in this ruling is further shown by the element of prosecutorial discretion. Trustees are not going to file disgorgement motions in every failed chapter 13 case.   If they did, they would spend more time litigating over fees than disbursing money to creditors. As a result, the trustee's self-interest will prevent the consequences of this decision from metastasizing out of control.    However, the open-ended legal standard, if generally applied, could allow trustees to seek disgorgement in most cases.   While one expects that trustees will limit their attempts to seek return of fees to truly bad cases, it is entirely possible that trustees could use this enormous power to retaliate against attorneys they do not like.   (I am not suggesting that any trustee in the State of Texas would do this.   I am merely pointing out the application of the dictum that power corrupts and absolute power corrupts absolutely).In every court, there are attorneys who go along to get along and others who zealously represent their clients even if it means clashing with the standing trustee or the U.S. Trustee.    The go along to get along attorneys are likely to remain below the radar and avoid having their fees targeted.   On the other hand, the attorneys who make a pain of themselves and stick their necks out are likely to face additional scrutiny.   Even if you assume the good intentions of those doing the objecting, it is simply human nature to pay more attention to cases in which they have actively participated.   Whether objections are motivated by malice, frustration or simply randomness, a selectively applied legal standard which mandates denial of compensation in most cases will deter zealous advocacy and harm the profession.   Even if you assume that trustees and judges will exercise restraint and discretion (to use the Fifth Circuit’s term), even the possibility of being financially destroyed will cause a rational attorney to hold back.    To put it mildly, I think this is a bad thing.  On this note, I will end my rant.Disclosure:  I do not know any of the parties to this case and was not involved. My knowledge about the case is limited solely to the published opinions and other documents in the case that I read.  This means that there may be nuances that I missed.  Additionally, I have a personal interest in these issues because I have represented an attorney who was faced with a disgorgement motion under section 329 and I have an appeal involving application of Pro-Snax to my firm's fees pending before the Fifth Circuit.

I was the third lawyer Lisa saw for a Virginia Bankruptcy Consultation Lisa had a Virginia Bankruptcy consultation with two well known bankruptcy lawyers.   Then she came to see me. Both of those lawyers told her that her income was too high.  She could not file a Chapter 7 bankruptcy.  She would need to file […]The post Virginia Bankruptcy Consultation: Preparation Makes a Difference appeared first on Robert Weed.