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Navigating L.A. Bankruptcy and Divorce Simultaneously

Blogs from March, 2014

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For some contemplating filing for bankruptcy‚ the move is preceded by the ending of a marriage.

It is common for couples who are separating to be faced with a host of money struggles. This is born not only of the fees associated with filing for divorce‚ but also with the new financial reality of maintaining two separate households while still attempting to manage all the same prior debts and obligations. Sometimes‚ the dissolution of the union was predicated on financial disagreements or dishonesty.

As the recent case of In re: Paul Ruitenberg‚ III reveals‚ divorce prior to or during a bankruptcy proceeding can thoroughly complicate matters. It’s important that those involved in these kinds of situations hire an attorney with extensive experience.

Here‚ the Third Circuit Court of Appeals ruled that a debtor’s ex-wife has an allowable pre-petition claim against the bankruptcy estate for equitable distribution of marital property in cases when the parties were involved in divorce proceedings prior to the filing of the bankruptcy petition – even if a final judgment in the divorce has yet to be issued.

The issue divided bankruptcy courts within the Third Circuit before the appellate court issued its decision.

According to court records‚ the soon-to-be-ex-husband filed for Chapter 7 bankruptcy protection. At the time‚ he and his soon-to-be-ex-wife were embroiled in divorce proceedings in New Jersey. When the petition for bankruptcy was filed‚ the family law court in New Jersey had yet to file a judgment of divorce‚ so there was no final judgment and nor was there any formal division of marital assets.

So when the husband filed for bankruptcy‚ his wife wife filed a timely proof of claim for $578‚000 against his bankruptcy estate‚ which she estimated was her equitable portion of the marital estate.

Under 11 U.S.C. § 507(a)(1)(A) and (B)‚ domestic support obligations are given priority over other types of claim. But this was not a claim for domestic support – it was a claim for equitable distribution of property – a substantial portion the bankruptcy estate.

The trustee of the bankruptcy estate in the case sought to expunge the claim of the ex-wife‚ arguing that the ex-wife’s interest in equitably dividing the marital property in the debtor’s bankruptcy estate was not a claim for purposes of the bankruptcy code because there was no final divorce decree entered.

Meanwhile‚ the trustee in the ex-wife’s Chapter 7 bankruptcy case (she too had filed) opposed the motion to expunge‚ arguing that the ex-wife had a contingent claim for equitable distribution of the marital property‚ and further that the claim was a pre-petition claim on the estate‚ meaning that her claim pre-dated his filing. (Had it been post-petition‚ the overall size of the marital estate would have been much‚ much smaller‚ as all of those assets would have been liquidated by that point.)

The bankruptcy judge sided with the trustee in the ex-wife’s case‚ finding that a pending claim for equitable distribution against the ex-husband’s bankruptcy estate came to light pre-petition‚ and therefore should be allowed.

The bankruptcy trustee in the ex-husband’s case filed an appeal‚ and the district court then certified the case for direct appeal to the Third District Court of Appeals. What the appellate court determined‚ based interestingly enough on an asbestos tort case‚ JELD-WEN‚ Inc. v. Van Brunt (In re Grossman’s)‚ (3d Cir. 2010)‚ was that a claim arising based on conduct that occurred prior to the bankruptcy filing is considered pre-petition – even when the cause of action didn’t arise until sometime after the bankruptcy filing. So even though the divorce wasn’t finalized at the time the bankruptcy was filed‚ the ex-wife’s claim should still be considered pre-petition‚ as it arose prior to the ex-husband’s filing for bankruptcy.

If you are contemplating bankruptcy in Woodland Hills‚ contact Cal West Law to schedule your free consultation. Call (800) 568-0707.

Additional Resources:
In re: Paul Ruitenberg‚ III‚ March 13‚ 2014‚ U.S. Court of Appeals for the Third Circuit

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