Court Lifts Automatic Stay in Chapter 7 Bankruptcy Proceeding Based Upon Accusations of Fraud

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.

house-1172352In 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.

The Automatic Stay is Designed to Protect Spouses From Each Other

The purpose of the automatic stay on the collection of marital property in one divorcing party’s bankruptcy is to protect the other spouse from losing access to marital property to which they should be entitled if the property is taken by creditors as part of the other spouse’s bankruptcy. The automatic stay is not designed, however, to allow couples anticipating bankruptcy to file for divorce in order to prevent creditors from accessing marital assets, nor should it be used to give one spouse a priority domestic support entitlement from the other spouse over and above the claims from all of the couple’s other creditors.

In this case, the Tenth Circuit agreed that the creditors and bankruptcy trustee have the same interest in uncovering fraud committed by the couple based upon the divorce action and settlement, and it ruled that the automatic stay should be lifted to allow the creditors and trustee to litigate the issue in state court. As a result of this ruling, the creditor may be able to void the transfer of the home from the debtor to his spouse and take possession of it as part of the Chapter 7 bankruptcy.

Should You Be Considering Bankruptcy?

If you or a loved one has questions about whether bankruptcy might be right for you, the Louisville and Southern Indiana bankruptcy attorneys at the Schwartz Bankruptcy Law Center can help answer them. Our attorneys can assist you with all aspects of your case and help you find legal, non-fraudulent ways to protect as much of your property as possible. Contact an experienced bankruptcy lawyer today and help get yourself back on the right track. At the Schwartz Bankruptcy Law Center, we advise and represent clients in various bankruptcy proceedings. Call 866-366-3328 to schedule a risk-free consultation or contact us through our website.

More Blog Posts:

Appellate Panel Sides with Debtor, Clarifies Credit Counseling Requirement in Chapter 13 Bankruptcies, Kentucky Bankruptcy Lawyers Blog, published December 11, 2015.

Ninth Circuit Affirms Dismissal of Pro-Se Debtor’s Bankruptcy Petition for Failure to Meet Deadline, Kentucky Bankruptcy Lawyers Blog, published August 17, 2015.

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