Case Analysis: Bankruptcy and Payment of Attorney Fees Incurred During Divorce Proceeding

A New Jersey Bankruptcy Court case decided in 2010 addressed the issue whether a Bankruptcy Petition filed by a divorced party who owed attorneys fees to the law firm representing his former spouse could be discharged.   The case also clarified the different treatment of such debts in Chapter 7 and Chapter 13 Bankruptcy and the complexity of how these issues are addressed.

“The divorce court awarded to the wife counsel fees in the amount of $85,000 to be paid by her former husband to the law firm that represented the wife, a sum that is calculated to level the playing field in the context of this unnecessarily prolonged litigation.  This sum shall be paid directly to [Ms. Prensky’s] counsel in three equal installments, the first of which shall be paid on or before April 1, 2008. The two subsequent payments shall be made on July 1, 2008 and September 1, 2008 … The obligation to pay the $85,000 in legal fees (“Law Firm Indebtedness”) was separate from, and in addition to, orders to pay child support, maintenance, martial debt, and an additional sum of $185,850.”

Thereafter, the husband filed a Bankruptcy Petition and sought to discharge his obligation of payment to the law firm.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) amended 11 U.S.C. §§ 523(a)(5) and (a)(15) of the Bankruptcy Code. Sections 523(a)(15)(A) and (B) were eliminated; these sections previously allowed debtors to render dischargeable non-support obligations that were incurred in the course of a divorce or separation if the debtor did not have the ability to pay the debt, or if discharging the debt would have resulted in a benefit to the debtor that outweighed the detrimental consequences to the spouse, former spouse, or child.  The debtor’s ability to pay is no longer a factor and bankruptcy courts do not engage in any balancing test of whether a debtor would gain more than his or her domestic relations creditors if the debtor were granted a discharge.

Under the New Code Sections 523 (a)(15) debt 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 government

Therefore the Bankruptcy Court found the the counsel fees that the Debtor was required to pay the the wife’s law firm to be a “divorce-related debt incurred by [Debtor] in the course . . . of the divorce proceedings between [Debtor and Ms. Prensky] and [is] non-dischargeable pursuant to 11 U.S.C. § 523(a)(15).”

Prensky, 416 B.R. at 410-11. The judgment of the Bankruptcy Court was affirmed on appeal to the United States District Court Prensky v. Clair Greifer LLP, 2010 U.S. Dist. LEXIS 66181 (D.N.J. June 30, 2010).


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