In a recently released decision, the United States Tenth Circuit Court of Appeals affirmed a district court and lower bankruptcy court decision to partially lift the automatic stay on the litigation of a bankruptcy debtor’s domestic support obligation after a creditor alleged that the debtor and his ex-wife colluded to keep assets from creditors in the bankruptcy by using a fraudulent divorce settlement agreement.
In the case, Lavenhar v. First American Title Insurance, the Tenth Circuit agreed with the lower courts that the creditor should be permitted to litigate the allegations of fraud in the state court divorce action, and it rejected the debtor’s claim that the bankruptcy trustee was the only party that had standing to challenge the debtor’s divorce settlement. Based on this ruling, the Chapter 7 creditors involved in the bankruptcy may be given access to nearly $500,000 worth of property that was awarded to the debtor’s ex-wife as part of the divorce settlement.
Allegations That The Divorce Was Used by the Debtor and Spouse to Keep Assets from the Bankruptcy Trustee.
According to the Tenth Circuit’s opinion, the debtor and his spouse agreed to divorce each other, and the debtor filed for Chapter 7 bankruptcy, all while the creditor was attempting to execute a judgment on the debtor to take possession of a home that the couple owned. The filing of the divorce action and bankruptcy automatically prevented the judgment creditor from proceeding to take the home because of the automatic stay that prevents the collection of marital property when one or both divorcing parties file for bankruptcy.