Case Analysis: Bankruptcy and Divorce and Distribution of Marital Property

A recent bankruptcy case highlights the issue of how, through the assistance of experienced and competent counsel, and use of the bankruptcy law protections, a bankruptcy debtor could legally protect their assets from their creditors and how the specific issues of bankruptcy and divorce interplay.

In DeHart v. Miller (In re Miller), 424 B.R. 171, the Bankruptcy Court was required to decide whether payments which were being made were support payments or payments for a party’s share of marital property.  The Debtor declared bankruptcy in April, 2009, and claimed that the $88,500 she was owed by her husband was not part of her bankruptcy estate under 11 U.S.C.S. § 522(d)(10)(D) because it was “alimony, support, or separate maintenance.

“Debtor’s marriage of ten years was dissolved by a divorce decree entered by the Court of Common Pleas of York County, Pennsylvania…The master’s report made recommendations for the resolution of economic issues concomitant to the dissolution of the marriage. In a section of the Report entitled “Recommendations with Respect to Equitable Distribution,” the divorce master recommended that 67% of the marital property be distributed to Debtor and the remaining 33% to Miller … After distributing specific property to each party, the divorce master determined that a “cash adjustment” of  $85,500.00 was required to effectuate this 67%/33% division of assets. Miller was given the option of paying the $88,500.00 in a lump sum or in monthly installments of $982.53 over nine years at 6%. … ” If a state court designates an award as something other than alimony, support or maintenance, this label does not control a bankruptcy court’s finding as to its true function. Smith v. Pritchett (In re Smith), 398 B.R. 715, 721 (B.A.P. 1st Cir. 2008).

The bankruptcy court agreed with the Debtor and held that the $88, 500.00 was exempt. “Although the master made that award in a section of his report labeled “Discussion and Conclusions of Law with respect to Equitable Distribution,” the language and substance of the report made it clear that the award was not just related to the debtor’s need for support; instead, it was founded on that need. In reaching its decision, the Court compared 11 U.S.C.S. §§ 522(d)(10)(D) and 523(a)(5) and found that it was appropriate to apply concepts used in both sections in a consistent manner.

Thus, the Court held that the Debtor, could protect these assets from her creditors as she required the funds for her “support”.   This highlights the importance of retaining experienced counsel in these matters and not relying on your own opinions or those of well-meaning friends of family to reach legal conclusions.

Caution:   The Question of Whether Payments Are Support or Alimony is fact sensitive and therefore requires a full analysis of all the facts and circumstance of the litigants, including but not limited to their income, assets, liabilities and obligations.   Therefore, if there is any doubt about the how a debt arising out of a matrimonial proceeding is classified, you should seek the opinion of an attorney who practices in this area of the law.


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