Article

Family Law Issues Under the Bankruptcy Reform Act

9/1/2005

I. Introduction

The Bankruptcy Reform Act of 1994 ("Reform Act") is the broadest modification to the Bankruptcy Code since its enactment in 1978. Section 304 of the Reform Act, titled "Protection of Child Support and Alimony," provides significant changes for debtors with obligations arising out of failed marriages. Effective as to bankruptcy cases filed on or after October 22, 1994, the Reform Act elevates the interests of non-filing former spouses and children of the debtor relative to other classes of creditors. The Reform Act also expands the types of domestic obligations which may not be discharged, affords additional protection to divorce related liens and transfers in favor of former spouses, and provides easier access to bankruptcy proceedings for nondebtor family law claimants.

The Reform Act creates opportunities and pitfalls for both divorce and bankruptcy litigants.  There are new possibilities for additional rounds of litigation — this time in the bankruptcy court — between litigious former spouses.  The obligation of the bankruptcy court to look behind divorce settlements and judgments is expanded.  For couples planning a "friendly divorce," the Reform Act opens an unintended door to collusive divorce-bankruptcy planning at the expense of their creditors.

The overlap between divorce and bankruptcy has always been untidy.  The Reform Act provides improvement.  It also preserves many of the old problems and introduces a whole new set of issues to be argued.  With that in mind, this article will note the amendments that most affect family law issues, reveal the first published cases addressing the amendments, and discuss the practical effects of the amendments.