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What is dischargeable in bankruptcy
•Most commonly:• credit card debt• medical bills• lawsuit judgments•personal loans• other unsecured debt• leases• car loan (surrender associated vehicle)•mortgage (surrender associated real property)
What is not dischargeable in bankruptcy
• 11 USC 523 sets forth the exceptions to discharge:• While there are certain circumstances where the following could be
dischargeable, generally, the following are not dischargeable. The three most commonly discussed are:• taxes• domestic support obligation (child support and alimony)• student loans or student benefit overpayments
• Others include:• loans made or guaranteed by a governmental unit• debts for willful and malicious injury by the debtor to another entity or property
of another entity• debts for death or personal injury caused by the debtor's operation of a motor
vehicle while the debtor was intoxicated from alcohol or other substances• debts for certain criminal restitution orders• debts owed to a pension, profit sharing, stock bonus, or other plan established
under section 401, 403, 408, 408A, 414, 457, or 501(c) of the Internal Revenue Code of 1986
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CHILD SUPPORT AND ALIMONY-TYPICALLY NOT DISCHARGEABLE
• To be nondischargeable under §523(a)(5), a debt must have been established or be subject to establishment before, on or after the commencement of the case through the provision of a separation agreement, property settlement agreement, divorce decree other order of a court of record or a determination made in accordance with State or territorial law by a governmental unit.
• When the characterization of a debt as alimony, maintenance or support is in dispute, the court should hold an evidentiary hearing to determine whether the debt is actually in the nature of alimony, maintenance or support within the meaning of §523(a)(5).
• The critical issue is whether the parties intended the obligation to provide support to the debtor’s spouse, former spouse or child. Whether the payment obligation derived from a duty to provide for the well-being of the spouse, former spouse or child.
Property Settlement Agreements
• 11 USC § 523 (a) (15)• Distinction of §523(a)(5) and §523(a)(15) in Chapters 7,
11, and 12 and Chapter 13 • §523(a)(15) provides unqualifiedly that a debt
encompassed in §523(a)(15) is not dischargeable. Thus, with respect to dischargeability in cases under chapters 7, 11, and 12, all of which base dischargeability on §523(a), the distinction between a domestic support obligation and other types of obligations arising out of a marital relationship is of no practical consequence. However, in a chapter 13, debtors encompassed by a §523(a)(5) are not dischargeable, while debts encompassed by §523(a)(15) are dischargeable.
Credit Card Debt
•Where the obligation to pay credit card debts “in lieu of “ alimony, the Bankruptcy Court is likely to find the obligation in the nature of support and not property settlement. Credit card debt that a debtor, filing individually or jointly, is solely responsible for outside of a Divorce Agreement is generally dischargeable as credit card debt is general unsecured debt.
• In Chapter 13 you can strip off 2nd mtgs if former spouse has quit claimed property to debtor
• Loan Modification: it works in bankruptcy! Non filing borrowers and former spouse income will not be required if Quit Claim Deed obtained
•Creates value in estates and can keep your charging lien from being fees from being included in the foreclosure
Part of Estate
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• Exceptions to the Automatic Stay – 11 U.S.C. § 362 (b)(2)• Bankruptcy does not operate as a stay –
• Of the commencement or continuation of a criminal action or proceeding against the debtor; under subsection (a)
• For establishment of Paternity;
• For the establishment or modification of an order for domestic support obligation;
• Concerning child custody or visitation;
• For the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is of the estate; or
• Regarding domestic violence;
• Of the collection of a domestic support obligation from property that is not property of the estate;
• 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 (e.g. Income Withholding Order).
• Practice Tip• Collection efforts, such as contempt proceedings, may not proceed against
property of the estate.
• Could proceed against exempt property like IRA, pension, and homestead.
Timing Effects of Bankruptcy During Dissolution or After Dissolution
• The Automatic Stay • The Automatic Injunction triggered by the filing of a bankruptcy petition
• (debtors should file a suggestion of Bankruptcy in State Court proceedings to alert creditors to stop all collection efforts). The Stay is in effect even is the Debtor does not file a Suggestion of Bankruptcy.
• Application of Automatic Stay – 11 U.S.C. § 362• Bankruptcy operates as a stay, applicable to all entities, of –• The commencement or continuation, including the issuance or employment of process,
of a judicial, administrative or other action of proceeding against the debtor; • The enforcement, against the debtor or against the property of the estate, of a judgment
obtained before the commencement of the case under this title; • Any act to obtain possession of property in the estate or of property from the estate or
to exercise control over the property of the estate; • Any act to create, perfect, or enforce any lien against property of the estate; • Any act to create , perfect, or enforce against property of the debtor any lien to the
extent that such lien secures a claim that arose before the commencement of the case under this title;
• Any act to collect, assess. Or recover a claim that arose before the commencement of the case under this title;
• The setoff of any debt owing to the debtor that arose before the commencement of the case under title against any claim against the debtor.
for Legal Defense
Call it a Support
Interest in property
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How does the bankruptcy court determine whether a debt is a Domestic Support Obligation?
• Whether or not a particular obligation is a domestic support obligation (and thus entitled to priority of distribution and excepted from discharge) is a question of federal bankruptcy law.
• It is critical that state court judges and parties to marital dissolution agreements spell out their intentions with respect to marital debts. This is particularly true with respect to indemnification agreements and any other third-party obligation such as attorney fees.
• Factors to be considered by a bankruptcy court:• Whether payments terminate upon death or remarriage of the spouse receiving
them; • Whether payments terminate when minor reaches a certain age; • Whether payments are contingent on future earning abilities; • Whether payments are to be periodic over a long period of time rather than in a
lump sum; • Whether the payments are designated as being for purposes such as medical
care, housing, or other needs of the spouse or children.
• ***Make sure that when you draft agreements you make it very clear that any transfer of money to the non-filing spouse is in the nature of alimony, maintenance or support, or similar language. The mere label will not be binding on a bankruptcy judge. ***
What is the best way to deal with one party paying the other party’s debt?
• Grant a security interest to the party in some property• Secure payment through a mortgage or a security interest/ or lien in some
• Secure a lien on an investment account.
• Record lien on title of car.
• Rather than having the one party pay the debt, then perhaps exchange properties or • Give them a greater portion of the property.
• Give them property in exchange for debt.
• IWO – voluntary agreed upon garnishment out of income source such as a paycheck.
• Putting a Triggering effect into the process: If there was a default in the divorce then a civil judgment would be entered against the person that allows execution against property.
• Monthly payments. But if paying creditors directly hard to control that.
• Instead of a debt call it a support payment (so not taxable anymore) and can’t discharge in bankruptcy. Subjects to contempt procedures and potential suspension/denial of professional licenses and driving privileges.
• Contempt Proceedings
• In re Campbell, 185 B.R. 628 (Bankr. S.D. Fla. 1995)• State contempt orders are not subject to the automatic stay and are permitted to
go forward provided that (1) the Debtor cannot be required to use property of the estate to make a payment of the pre-petition debts for support or maintenance, and (2) the purging of any contempt order cannot be made conditional upon payment of the money from the property of the estate.
• In re Montana, 185 B.R. 650 (Bankr. S.D. Fla. 1995)• Automatic stays do not prevent state divorce courts from compelling compliance
with its pre-petition orders that the debtor has violated. A spouse’s action to collect pre-petition support arrearage is not subject to the automatic stay so long as the property of the estate is not used to satisfy the claim. A bankruptcy filing does not state the State Court’s right to carry out its orders of incarceration of the debtor for their failure to pay court ordered support and alimony obligations. (Consider indirect criminal contempt if the facts warrant such an action).
• Carver v. Carver, 954 F.2d 1573 (11th Cir. 1992). • Bankruptcy Courts do not have the power to modify child support.
• In re Hutchens, 480 B.R. 374 (Bankr. M.D. Fla. 2012). • A spouse is bound to a debtor’s confirmed plan. A spouse cannot attempt to
collect arrears until a bankruptcy case is closed. Portions of payment obligations that are unaccounted for are not dischargeable.
• In re Diaz, 647 F.3d 1073 (11th Cir. 2011). • Bankruptcy court’s discharge order does not discharge a debtor’s child support
obligation. Therefore, a state child support agency cannot be enjoined from attempting to collect child support from the debtor after discharge (in a Chapter 13 case).
Loss and Damages
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In a marital settlement agreement one can seek indemnification for:
• Legal Liability• Be careful, this is a term of art and means that in order to recover from the
other party there must be a judgment finding legal liability entered against the party seeking indemnification before the issue is ripe in the family law court. - Jerome Nagelbush, Inc. v. Frank J. Rooney, Inc., 342 So. 2d 121 (Fla. 3d DCA 1977)
• Loss and Damages• Be careful, does not include your own negligence - The Florida Supreme
Court has ruled that indemnity agreements which hold one harmless for one's own negligence are disfavored. Such contracts protecting a party from their own sole negligence will be enforced only if they express a clear and unequivocal intent to protect the indemnitee from his or her own wrongful acts. In order for an indemnity agreement to indemnify against the indemnitee's active negligence, it must contain a specific provision protecting the indemnitee from liability caused by such person's own active negligence. See Skidmore, Owings and Merrill v. Volpe Const. Co., Inc., 511 So. 2d 642 (Fla. 3d DCA 1987) See also; University Plaza Shopping Center v. Stewart, 272 So. 2d 507 (Fla. 1973); Winn Dixie Stores, Inc. v. D & J Const. Co., 633 So. 2d 65 (Fla. 4th DCA 1994)
• A person filing for bankruptcy should include all debt in their name, even when the debt is divided and assigned to another spouse in the divorce. Creditors are not bound by the divorce judgment or settlement but instead rely on the contract formed by the person who assumed the debt at the time it was created. If a spouse occurs debt solely in their name, even though it may be deemed community property in a divorce decree, the spouse is still legally indebted to the creditor.
• For example, in Dowie v. Dowie, 668 So. 2d 290, 292 (Fla. 1st DCA1996), a marital settlement agreement by the parties, read on the record prior to the final judgment being entered, the wife agreed to pay off certain joint credit card debts. A year later the wife filed for bankruptcy and the debt was discharged. The husband filed requesting he be paid by the wife the portion of the debt she was discharged and that he was required to pay. The court held that the debt was properly included in the wife’s bankruptcy and discharged because the marriage settlement agreement was binding on the parties and the joint debts became the wife’s debts prior to her filing the discharge, which permits them to be included in her bankruptcy filing.
• Attorney’s Fees and Legal Defense• Be careful though it has its limits Where a party has been
indemnified and seeks to have the indemnitor undertake the defense of the claim, the indemnitee cannot make unreasonable demands in connection with the undertaking of the defense. In one case, an indemnitee could not require an unreasonable bond as a condition to allowing the indemnitor to undertake the defense. T.C. Miller, Inc. v. Storer, 540 So. 2d 211 (Fla. 4th DCA 1989)
• Bottom line is pay attention to your indemnification clauses in your MSA’s and try to make them as broad as you can if you are representing the party that may need indemnification, and if you are representing the party that may have to be doing the indemnifying in the future try to get them as narrowly written as possible!