What’s an Automatic Stay and Why Does It Matter in Bankruptcy and Divorce?

SERIES: Bankruptcy and Distressed Property in a Domestic Relations Matter
Part 1- How Bankruptcy Affects Distressed Property in Divorce or Dissolution: The Basics
YOU ARE HERE:  Part 2- What is an Automatic Stay and How Does it Affect Divorce?
Part 3- How Chapter 7 and Chapter 13 Bankruptcy Affect Debt Discharge in a Divorce or Dissolution

Last week was the first in a series of three articles on bankruptcy lawsuits and the implications of those proceedings, especially as it concerns distressed property, in a domestic relations (i.e. divorce or dissolution) matter. In the first article, we covered the basics, including identifying the different goals of the various legal actions, as well as where and how these proceedings can intersect. We also briefly outlined some of the factors which can complicate matters when bankruptcy and domestic relations proceedings do, in fact, collide.

What is an Automatic Stay?

In this second article, we will focus our discussion on one of those procedural complications: the “automatic stay” in a bankruptcy lawsuit. Although the term “stay” may sound daunting, in actuality, it refers to a simple and straightforward concept. In fact, just think of it as a fancy, legal term which basically means “pause”. So, why does this “pause” matter for our purposes?

As a general matter, the U.S. Bankruptcy Code provides that the filing of a petition for bankruptcy operates to “stay” a significant number of other legal proceedings, including but not limited to lawsuits which relate to or involve property of the debtor’s estate. The rationale behind the “stay” is that, if the debtor is seeking the protections of the bankruptcy court due to his or her current financial circumstances, then the bankruptcy aspect of the case should be addressed first in order to give the debtor some breathing room from his or her creditors. This, ultimately, helps enable the orderly disposition of the debtor’s obligations before any other legal proceeding related to the property of debtor can proceed. Notably, this “stay” is automatic, and thus, not something that the debtor or any other party has to request that the bankruptcy court issue. Further, the affected, separate legal proceedings will, generally, remain “stayed” until the earliest of the date that the bankruptcy case is closed, dismissed, or a discharge of the debt at issue is granted.

As a result of this fact, a legitimate question naturally arises: does the “automatic stay” operate in such a way that no facet of a domestic relations matter can proceed, and such that the parties cannot get a divorce? No, not necessarily—and specifically, because of the existence of: (1) certain statutorily-defined exceptions to the “automatic stay”; and (2) the ability to request relief from the “automatic stay”. Each one of these two (2) possible remedies is explored in more detail hereinafter.

Statutory Exceptions to the Automatic Stay

First, there are exceptions to the “automatic stay.” Specifically, the U.S. Bankruptcy Code lists several legal proceedings—or aspects of legal proceedings—that are excepted, as a matter of law, from the “automatic stay” in a bankruptcy lawsuit. In relevant part, those excepted legal proceedings (or aspects of legal proceedings) include those concerning:

1. the establishment of paternity;
2. the establishment or modification of an order for domestic support obligations;
3. child custody or visitation;
4. the dissolution of marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate;
5. domestic violence;
6. the collection of a Domestic Support Obligation from property that is not property of the estate; or
7. the withholding of income that is property of the estate or property of the debtor for payment of a Domestic Support Obligation under a judicial or administrative order or statute.

Notably, the aforementioned categories of legal proceedings substantially overlap with topics that are frequently—or must be—addressed in domestic relations matters, like divorce and dissolution. Ultimately, what this means is that, while the “automatic stay” from a bankruptcy proceeding may put the property division and some financial issues in a domestic relations matter on hold, any aspect of a domestic relations matter that falls under one of the above-listed categories, like child custody or visitation, can likely still proceed.

Several of these exceptions—in particular, the exception to dissolve a marriage (#4 above) and the exceptions related to Domestic Support Obligations (#’s 6 and 7 above) are worthy of further explanation.

As an initial matter, while a marriage can, technically, be dissolved while an “automatic stay” is in place, the underlying domestic relations matter likely cannot be finalized while the “automatic stay” remains ongoing. This is because the full and complete finalization of such matters usually requires a determination as to the division between the parties of their property, debts and financial issues (and thus, property of the debtor’s estate). As such, this particular exception is usually a distinction without difference.

In addition, and given the current global economic climate, the aforementioned exceptions related to Domestic Support Obligations may prove to be highly relevant in connection with certain domestic relations matters. A Domestic Support Obligation, as a general matter, is a debt that is owed to or recoverable by a spouse, former spouse, child of the debtor, or similar category of person, which is in the nature of alimony, maintenance or support, and is established pursuant to a divorce settlement agreement or court order. In order to simplify things, think of a Domestic Support Obligation as what is generally understood as child support and spousal support. We will explore the concept of a Domestic Support Obligation in more detail in the third and final installment of this series.

Requested Relief from the Automatic Stay

Second, under certain circumstances, the U.S. Bankruptcy Code allows a debtor or another party in interest to request that the bankruptcy court issue relief from the “automatic stay” in order for the other separate legal proceeding to proceed. In this way, property issues in a domestic relations matter may be able to be resolved and/or finalized while a bankruptcy proceeding is pending, as long as the bankruptcy court, as a prerequisite, grants relief from the “automatic stay.” In granting this relief, the bankruptcy court, in essence, provides permission for the domestic relations matter to move forward.

So, practically speaking, what does this all mean? That’s probably easiest answered with an example.

An example of Bankruptcy Proceedings in Divorce

Let’s say that a husband files a divorce proceeding in an Ohio court against his wife in October. The parties have two children. They have a home, which is in the wife’s sole name, and which is secured by a mortgage in the wife’s sole name. However, they do not have any other substantial property other than a joint bank account. The wife has a substantial amount of unsecured credit card debt in her sole name, which was incurred during the marriage, and which has gone unpaid for some time. The wife is employed, earning minimum wage, but the husband was let go from his job due to COVID-19 earlier in the year. As a result, the parties’ intention is to sell their house immediately, as neither party can now afford to pay the mortgage. The following month, in November, the wife files for bankruptcy in her name only (i.e. not jointly with her husband) with the requisite federal bankruptcy court in Ohio. The wife files for bankruptcy because collections agencies are now aggressively pursuing her for repayment on the credit card debt.

How Automatic Stay Can Affect Divorce Proceedings

As a practical matter, upon the wife’s filing for bankruptcy in November, the “automatic stay” would operate to stay the divorce proceeding filed in October. However, while the bankruptcy proceeding remained pending, the parties and the domestic relations court could likely still address any custody and visitation issues pertaining to the parties’ two minor children, as well as issues of temporary spousal and child support, if appropriate. To the extent the parties desired to sell their home while the bankruptcy proceeding was still pending, a request for relief from the “automatic stay” would likely need to be filed with the bankruptcy court in order to accomplish the same. However, if no relief from the “automatic stay” was sought from the bankruptcy court, then the parties would probably need to wait until the bankruptcy proceeding had concluded in order to finalize the details of the property division and other financial issues in their divorce proceeding, including the sale of the home.

Notably, while the “automatic stay” often can and does delay a pending domestic relations matter, the mechanism, as a practical matter, impacts domestic relations matters differently depending on exactly which type of bankruptcy proceeding has been initiated. We will explore some of the different types of bankruptcy proceedings and their potential implications on domestic relations matters in the third and final article in this series.

At KJK Family Law, we understand just how overwhelming navigating these and similar issues can be, especially during an already stressful time. But you don’t need to go it alone. For further guidance on these and other related matters, please contact John D. Ramsey (jdr@kjk.com), Janet R. Stewart (js@kjk.com), or another member of KJK Family Law by calling 216-696-8700.