afc law 

ANGEL FRANCISCO CÓNDOM, P.A.

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FAMILY LAW AND BANKRUPTCY

Bankruptcy law does not necessarily place divorced or divorcing spouses in an adversarial posture. Sometimes a joint bankruptcy case can reduce the financial pressures on a troubled marriage, thereby facilitating reconciliation. Discharge of debts and the avoidance of liens on property can enhance the size of the estate to be divided or, at least, will reduce the debts to be divided. Avoidance of liens on exempt property will increase assets that might otherwise be lost. A jointly planned bankruptcy case before a divorce might equalize the bargaining power of the spouses, eliminating the threat that one spouse will later file and leave the other to pay all of the joint debts.


JOINT AND CONSOLIDATED CASES

A husband and wife can file a joint case under Chapter 7, 11, 12 or 13. Both names are on the same petition and schedules, and only one filing fee is due. Only spouses are allowed to file a joint petition. When a joint petition is filed, the court determines whether the cases should be consolidated. Even though the petition is ''joint,'' two separate cases exist. If necessary to protect the rights of creditors, the court can order the appointment of a different trustee for each debtor. Even if the same trustee is appointed for both estates, the estates must be accounted for separately. This is important when one spouse has more property than the other or the interests of creditors of each are different.

In most cases involving spouses who file a joint petition, the property and liabilities of each are so intermingled that consolidation is appropriate. The court will consider whether there will be a detriment or a windfall to creditors if cases are consolidated and will not do so if adverse treatment of either spouse's creditors will result.

Both spouses must elect either state or federal exemptions, if federal exemptions are available in their state. They may not, however, take advantage of both exemption systems by one taking state exemptions and the other taking federal exemptions.


PROPERTY & BANKRUPTCY ESTATES

The filing of a petition in any chapter of the Bankruptcy Code creates an estate that includes all legal and equitable interests in property of any kind that the debtor owns, wherever located, as of the time of filing. The interests of both spouses in most community property assets will be included in the estate, even if only one spouse is a debtor.


RIGHTS OF CO-OWNERS 

The bankruptcy estate includes the debtor's interest in property in which the debtor has only an undivided partial interest with another person who has not filed a petition. The co-owner often is the debtor's spouse as joint tenant, tenant in common, or tenant by the entireties. Only the debtor's undivided interest in joint tenancy and tenancy in common property is in the estate, and the trustee becomes a co-owner with the other tenant or tenants. Whether tenancy by the entireties property is in the estate or is exempt is determined largely by state law and whether joint creditors are present. The estate also includes most community property in which the debtor has an interest.


EXEMPTIONS

A major theme of the bankruptcy system is that the honest debtor is entitled to a ''fresh start'' after discharge. At least the necessities of life are required by the debtor, spouse, and dependents to make the fresh start meaningful, which is the purpose of exemptions. Exempt property is property that can be kept by the debtor and not distributed to creditors in the bankruptcy case.

Every state has its own scheme setting forth property that is exempt from claims of creditors. The Bankruptcy Code introduced a uniform set of federal exemptions, but it continues to allow individual debtors the option of selecting the state exemptions plus any exemptions available under federal non-bankruptcy law. Debtors using state exemptions may also claim any interest in joint tenancy or tenancy by the entireties property that is exempt from process under non-bankruptcy law.

Married joint debtors or married debtors whose cases have been consolidated may each claim a set of exemptions. They may use either state or federal exemptions, if federal exemptions are allowed, but one spouse cannot use state and the other federal exemptions. If they cannot agree, they are both deemed to have elected federal exemptions if allowed in that state.


DEBTS EXCEPTED FROM DISCHARGE

The major reason for an individual going through a bankruptcy case in any chapter is usually to obtain a discharge. This operates as an injunction prohibiting creditors holding pre-petition debts from collecting them from the debtor. Certain debts are not dischargeable as to individuals under Chapters 7, 11, 12 and under the Chapter 13 hardship discharge. Non-dischargeable debts that are pertinent to family law issues include the following:


* Alimony, maintenance or support of a spouse, former spouse or child that arose in connection with a separation agreement, divorce decree or other court order, and obligations that are in lieu of such orders; and


* Property division obligation arising under separation agreement, divorce decree, court order or order of governmental unit, unless the debtor is unable to pay from income necessary for the support of the debtor or dependents or, if the debtor is in business, is unable to pay from income necessary for the continuation, preservation and operation of the business.


ETHICS OF REPRESENTING BOTH SPOUSES


Most of the time both spouses filing petitions or a joint petition will have the same economic goals. However, not all spouses have unity of economic interests. If spouses have conflicting goals or if one course of action will achieve results having greater benefit for one spouse than the other, they have a right to independent legal advice. Each spouse has the right to undivided loyalty of an attorney, and an attorney has the corresponding duty to act without conflicts of interest.