SCOTUS decision on DOMA affects Joint Bankruptcies

On June 26, 2013, the Supreme Court of the United States declared in United States v. Wilson, that section 3 of DOMA (the "defense of marriage act") is unconstitutional. Previously this section prevented federal agencies from treating same-sex marriages as marriages for benefits and tax purposes. This means that many federal spousal benefits (such as spousal benefits for federal workers) were not be available to same-sex spouses.

Additionally, for Federal tax returns, same-sex married couples could not file under married status. The ruling in Wilson changed all this and for federal purposes marriages valid in Massachusetts are now also recognized by the federal government.

Although it is administered at a state level and each state has the ability to specify its own procedural rules and an alternate exemption scheme, the Bankruptcy Court applies federal law. Since the Bankruptcy Code applies federal law, bankruptcy courts were required to follow the requirements of DOMA (the Defense of Marriage Act) and refuse to recognize joint bankruptcy filings by same-sex married couples.  Under DOMA section 3 the definition of marriage for federal law was limited to marriage between one man and one woman, thereby excluding same-sex marriages from federal recognition.

The Wilson decision now provides same-sex married couples the same bankruptcy benefits as all other married couples including:

1. A married couple can petition for relief jointly. 
2. Debts that are owned by either spouse individually, and/or by both spouses jointly can be discharged under one proceeding. 
3. Both debtor-spouses proceed through the bankruptcy process together under the same case, meaning that all conferences and appearances are jointly held with both debtors, and both spouses can count on consistent relief from one bankruptcy court judge and one bankruptcy trustee. 
4. There is a financial savings to filing jointly: Joint debtors pay only one filing fee for the petition (ranging from $274 to $1,049, depending on the chapter) and usually attorney’s charge less fees for one joint filing then they would for two separate individual filings.
5. There is also a significant benefit to filing jointly because of how exemptions are calculated. Exemptions, i.e. the amount of property that cannot be taken to pay your debts, doubles for a joint filing, making it possible to protect more assets, regardless of which spouse owns the property.

What does it mean if someone listed me in their bankruptcy as a Co-Debtor?

When a joint obligor on a promissory note or other debt files for bankruptcy, the bankruptcy code requires that notice of the bankruptcy case is provided to the creditor and all co-debtors who are also obligated to pay the debt. If you receive notice that a co-borrower or co-debtor on a particular debt has filed for bankruptcy, it means that the debtor is complying with this particular requirement of the statute. In order for any actual or contingent obligation to be dischargable in bankruptcy, the creditor (the individual or business which is owed money by the debtor) must receive notice of the bankruptcy case, and have the right to object to the discharge of the debt, if appropriate legal grounds exist to object.

The reason that the code requires that all co-borrowers receive notice is because whenever there is a joint debt, the individual co-borrowers have “contingent, unliquidated claims” against all the other borrowers. Put another way, if Danny and Alice borrow $5,000.00 jointly, and Danny doesn’t pay , the lender can sue Alice and force her to repay all of the $5,000.00. Alice can then sue Danny and force him to contribute to the payment of the judgment obtained against Alice. However, in the event Danny files for bankruptcy, neither the original lender, nor Alice can sue Danny in an attempt to collect the balance even if the lender seeks to collect against Alice.

In this case, Alice would be best served to speak to a bankruptcy attorney, because she has a very limited time to do what she can to protect her claim, if anything. Alice’s right to collect any money from Danny is very fact specific, and the whole story will determine whether Danny’s “contingent” debt to Alice can similarly be discharged. If you find yourself owing a joint debt with someone who has recently filed for bankruptcy , contact Attorney Matthew P. Trask to discuss your rights and obligations.

To read more about co-debtors and bankruptcy, see our post What happens to my Cosigner if I file for Bankruptcy.

4 Facts Your Divorce Attorney Should know about Bankruptcy? Fact #3: Jurisdiction over Your Debts

The Divorce Court has the power to divide not just assets, but also debts. Just as the Court can assign the property titled to one spouse to the other spouse if the equities require, the Court can also order one spouse to pay the debts of the other spouse. But the Bankruptcy Court has the power to discharge debts. So what happens if the Divorce Court orders a spouse to pay a joint credit card debt, but the Bankruptcy Court gives that same spouse a discharge of that debt.

For purposes of this example, let's assume that the Husband and Wife were each ordered to pay half of a joint credit card debt. The Wife then files for bankruptcy and the credit card debt is discharged. Both the Husband and Wife were liable for the whole debt to the credit card company, but now only the Husband is liable to the credit card company. If the payment ordered by the divorce court is not categorized as a domestic support obligation (discussed in our next post) then the Wife no longer owes the debt to the credit card company or the Husband, and the Husband is left having to pay the entire debt.

It is possible for Separation Agreements or Divorce Judgments to avoid this problem by using assets to pay (or offset) debts, instead of trying to reassign debts. If enough assets are not available to do this then payments such as alimony, which are domestic support obligations, can be used instead to accomplish this same goal and avoid the discharge problem.

This issue can be further complicated when the debt that is at issue is a mortgage or secured debt. In order to avoid costly mistakes for divorce clients, we encourage divorce practitioners to consult with bankruptcy counsel when there is the potential that one party in the divorce will file for bankruptcy.

Click here to read Fact #2: Domestic Support Obligations.