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Scura, Wigfield, Heyer, Stevens & Cammarota Blog

The Interplay Between the Automatic Stay and Divorce

[fa icon="clock-o"] September 6, 2017 [fa icon="user"] David L. Stevens [fa icon="folder-open'] Divorce, Bankruptcy

divorced couple filing bankruptcyThe filing of a petition with the Bankruptcy Court instantaneously shields the debtor from most further acts by creditors to collect on debt owed as of that date. Filing automatically invokes the automatic stay under § 362(a) of the Bankruptcy Code. As a result, the debtor‘s estate is preserved for all creditors. The stay protects both the debtor, who gets relief, and the creditors as a group, whose claims are protected against other creditors who could otherwise pursue their own remedies. It puts a stop to the typical creditor‘s “race to the courthouse”, and replaces it in a Chapter 7 context with an “equitable distribution” of all of the assets of the bankruptcy estate. Unfortunately for a non-filing spouse, a Bankruptcy filing takes away the critical right of the family court to continue with a divorce action with regard to property division:

Subject to certain exceptions, actions stayed under 11 U.S.C. § 362(a) include:

(1) Commencement or continuation of judicial or administrative proceedings.

(2) Enforcement of a judgment;

(3) Acts to obtain possession of property of the estate or from the estate or to exercise control over property of the estate. The Automatic Stay is not limited to judicial or legal attempts by a creditor to obtain the collateral securing an obligation.

(4) Acts to create, perfect or enforce a lien against property of the estate or against the debtor, except for the filing of a Mechanic‘s Lien.

(6) Acts to recover a claim arising prior to the bankruptcy

(7) Any set-off.

Marital Law Exceptions to the Automatic Stay

Subsection (b) of § 362 of the Bankruptcy Code provides significant exceptions to the Automatic Stay for some but not all actions concerning marital dissolution. Actions which are not stayed by the filing of a petition are:

(b) The filing of a [bankruptcy] petition...does not operate as a stay…

(2) under subsection (a)—

(A) of the commencement or continuation of a civil action or proceeding—

(i) for the establishment of paternity;

(ii) for the establishment or modification of an order for domestic support obligations;

(iii) concerning child custody or visitation;

(iv) for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate; or

(v) regarding domestic violence;

(B) of the collection of a domestic support obligation from property that is not property of the estate;

(C) with respect to the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute;

(D) [Not Applicable];

(E) of the reporting of overdue support owed by a parent to any consumer reporting agency as specified in section 466(a)(7) of the Social Security Act;

(F) [Not Applicable]; or

(G) [Not Applicable];

Lifting the Automatic Stay

A creditor who desires to continue its collection action against the debtor can generally only do so if the debtor fails to make a payment or keep a promise made after the filing of the bankruptcy (for failing to make a payment that comes due post-petition on a car or home, for example). The debts that accrued based on the obligations arising before the filing of the bankruptcy are handled in the bankruptcy process. If the creditor can show “cause”, then the creditor may go into Bankruptcy Court and file a Motion to Lift the Automatic Stay pursuant to Section 362(d) of the Bankruptcy Code. A Motion to Lift the Automatic Stay takes approximately 30 days to accomplish.

Cause may include lack of “adequate protection” of an interest in the property of the parties seeking the relief, or with respect to a stay of an act against the property, where the debtor has no equity in the property and the property is not necessary to affect reorganization. (See 11 U.S.C. § 362(d)). However, if one spouse files for bankruptcy in the middle of a divorce, the other spouse cannot lift the automatic stay to allow the divorce to proceed with property division. Although it is possible for the other portions of the divorce to go forward, whether a state court judge would or could do so depends on the judge and the circumstances in the case.  The parties could request the Bankruptcy Court to abstain and instead allow the state court to consider proper division of property. If the Bankruptcy Court refuses to abstain then the state court judge must wait to divide property until after the bankruptcy is completed.

Schedule a Free Bankruptcy Consultation Today!

Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.

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