The Journal of The DuPage County Bar Association

Back Issues > Vol. 28 (2015-16)

Trending Now: Protection Against Discharge of Certain Divorce Related Attorney Fees in Bankruptcy
By Arthur W. Rummler

Family law attorneys do a commendable job under difficult circumstances. Not every case is the War of the Roses, but it’s
rarely a walk in the park. Unfortunately, one reality of doing family law is that clients may eventually file bankruptcy. It is a well-known fact that many divorcing couples exhaust their savings and available credit leading to financial distress and in some cases, bankruptcy.

What happens to your accounts receivable when you receive a Notice of Bankruptcy filing from the clerk of the bankruptcy court? Are your chances of getting paid good, bad or ugly? The answer is that it depends.

Typically, most attorney fees are dischargeable in bankruptcy cases. However, in family law matters the attorney fees may not be dischargeable under certain circumstances. This does not include a debt owed to a family law attorney by a client or former client that has now filed bankruptcy. That is a considered a contract debt and is dischargeable in all circumstances. In the matter of In re Rios1 the Seventh Circuit held that attorneys’ fees owed by the debtor-client were not excepted from discharge.

Since the 2005 revision of the Bankruptcy Code, commonly known as BAPCPA, there is a growing trend toward protecting certain types of divorce related attorney fees from being discharged. What kind of fees and how to protect them from being discharged was at the heart of a case in the United States Bankruptcy Court for the Northern District of Illinois, known as In re Mitchell.2 Mitchell is the most recent pronouncement from the Northern District of Illinois on this point of law.

In Mitchell, the former husband filed a petition for relief under chapter 7 of the Bankruptcy Code. The attorneys for the debtor’s former wife brought an adversary proceeding in the underlying chapter 7 bankruptcy case, contesting the dischargeability of attorney’s fees owed by the debtor to the former wife’s lawyers. The fees in question arose from representation of the debtor’s former wife in a post-decree divorce matter. Specifically, the debtor agreed that the fees were awarded to the lawyers pursuant to 750 ILCS 5/508(b) and 5/501(c-1). At trial, the parties stipulated to the pleadings and exhibits and chose to not to introduce any testimony, agreeing that the dispute was a matter of law. The attorneys sought to have the fees owed to them excepted from discharge under either section 523(a)(5) or (a)(15) of the Bankruptcy Code.

A debt owed for a “domestic support obligation” is not discharged in bankruptcy pursuant to 11 U.S.C. §523(a)(5), which states:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt...(5) for a domestic support obligation; The Bankruptcy Code defines domestic support obligation at 11 U.S.C. §101(14A). That section provides:

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 accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, 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, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.

Thus, the Bankruptcy Code prohibits discharge of debts owed for alimony, maintenance and child support payments, provided they fall within the definition of a domestic support obligation. Section 523(a)(5) applies to discharges under both chapter 7 cases and chapter 13 cases.3

Another level of protection against discharge is stated in 11 USC §523(a)(15). This section excepts from discharge debts incurred in a family law matter, but not in the nature of a domestic support obligation. Section 523(a)(15) states:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt- . . . . .(15) 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; . . .

The clear reading here is that a debt that is not a domestic support obligation covered by section 523(a)(5), but was incurred during a divorce or separation and is owed to either a spouse, former spouse or child of the debtor, is non-dischargeable under section 523(a)(15). This section only applies to chapter 7 cases and not chapter 13. In other words a debt of the type covered by 523(a)(15) can be discharged in a chapter 13 case.

Coming back to the decision in Mitchell, the court had to decide whether the award of attorney fees to the former wife’s attorneys fell under either section 523(a)(5) or 523(a)(15). The fees were awarded in the setting of a divorce case, but did they meet the other requirements under the Bankruptcy Code?

Both section 523(a)(5) and 523(a)(15) include language that the debt must be owed to a spouse, former spouse or child of the debtor. In Mitchell, the plaintiff was the former wife’s lawyers. The defendant debtor asked the court to read the statutes strictly and allow the debt to the attorneys to be discharged.

The Mitchell court thoroughly considered the facts and the law in determining whether the debt was not dischargeable under 11 USC §523(a)(5) or 523(a)(15). A key point in the inquiry was whether the protection from discharge extended to the third party lawyers. That issue was decided in favor of the attorneys.

The court cited the trending law on the subject. The vast majority of courts have decided that the nature of the debt, rather than the payee, should be the controlling factor. Thus, the defendant in Mitchell lost that argument and the court found that a third party lawyer or firm could be included in the protected class under either section 523(a)(5) or 523(a)(15). The remaining issue was whether the debt was in the nature of alimony or support and thus covered by section 523(a)(5), or if it was simply a debt incurred during a divorce case and covered by 523(a)(15).

On this subject, the court found no evidence to apply 523(a) (5). The court stated that the plaintiff had not produced any
evidence on that issue.

The court did give guidance on what facts would make such a debt fall under 523(a)(5) by citing to the intent of the parties or of the court in awarding fees. Also, the Mitchell court reiterated prior cases where evidence showed that the non-debtor former spouse would be liable for the debt if the debtor were to receive a discharge. Without any such evidence in the record, the court was compelled to find that 523(a)(5) did not apply. The Mitchell court then turned to section 523(a)(15). Here the court found that the debt was clearly incurred by the debtor in the setting of a divorce case, albeit a post-decree matter. In making that finding the court denied the debtor a discharge as to the attorney fees owed by the debtor to the former spouse’s attorneys.

Being that the debt was found to be the type defined under 523(a)(15), the creditor was subject to some level of risk.

Recall that debts that fall under 523(a)(15) can be discharged in a chapter 13 case. Thus, the plaintiff would have been wiser to introduce some evidence of potential liability or other facts that would allow the court to apply 523(a)(5) instead.

In practical terms, a creditor lawyer with a debt owed by his or her client’s former spouse has options. The debt may not
be dischargeable in chapter 7 if it is found to fall under 523(a) (5) or 523(a)(15) of the Bankruptcy Code. If the debt is only
found to be under 523(a)(15) it may be subject to discharge in bankruptcy chapter 13, but not if it falls under 523(a)(5) as a
domestic support obligation.

If the debt is considerable it is advisable to challenge the debtor through the filing of an adversary complaint and seek to have the court determine the true nature of the debt. In the setting of a chapter 13, the same is true, but the lawyer clearly wants the court to find the debt falls under 523(a)(5) as a domestic support obligation. Armed with a favorable finding, the lawyer can then continue collection efforts once the debtor exits bankruptcy or if the case is a chapter 13, require that payments be made during the plan.

1. 901 F.2d 71 (7th Cir. 1990)
2. In re Mitchell, 2013 WL 2422694. Also available on FastCase.
3. See 11 U.S.C.§727(b) and §1328(a)(2)

Arthur Rummler is a sole practitioner with an office in Glen Ellyn, Illinois, concentrating his practice in all phases of bankruptcy law and creditor/debtor matters. Mr. Rummler is a 1987 graduate of the University of Michigan Ross School of Business Administration and received his J.D. in 1991 from Chicago-Kent College of Law. He is currently a member of the DCBA Board of Directors and has also served as Assistant Treasurer, Chair of the Law Day, Entertainment and the Bankruptcy Law Committees.

 
 
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