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Bankrupcty and Family Law

The Effects of Bankruptcy on Nonmarital Family Relationships

In recent years family law has expanded to take into account issues concerning grandchildren, stepchildren as well as agreements and obligations between unmarried cohabitants, including gay and lesbian couples. The bankruptcy laws have lagged behind in addressing these developments. As initially enacted in 1978, the Bankruptcy Code did not except from discharge orders for the support of children born out of wedlock, the rights of parties to annulled marriages remain unclear, and other family-related obligations are not even addressed in the Bankruptcy Code.

The Rights of Children Born Out of Wedlock

Until 1984, the Bankruptcy Code had no specific provision that prevented the discharge of an order that the debtor support a child born out of wedlock. Prior to that time, the Bankruptcy Code applied only to debts ''in connection with a separation agreement, divorce decree, or property settlement agreement.'' The Bankruptcy Amendments and Federal Judgeship Act of 1984 amended the Bankruptcy Code by adding the language ''or other order of a court of record'' to the list of obligations for support of a child, spouse, or former spouse of the debtor. The language was again amended by the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy act of 1986, which broadened the section to include support determinations by governmental units other than courts, such as administrative agencies. The Bankruptcy Reform Act of 1994 added further protections for support orders owed to children born out of wedlock. To the extent such orders have not been assigned, prepetition debts owed under such orders are priority claims, payments on such debts cannot be avoided as preferences, and judicial liens for such debts probably cannot be avoided. In addition, the automatic stay no longer prohibits an action to establish paternity or a proceeding to establish or modify child support.

Necessity for a Court Order or Determination of a Governmental Unit

The language of the Bankruptcy Code provides that a child support obligation not arising in connection with a separation agreement, divorce decree, or property settlement agreement must arise in connection with a court order or determination of a governmental unit in order to come within the scope of that nondischargeability provision. An agreement by a parent to support a child born out of wedlock, even if in writing, is outside the scope of those sections unless it was in connection with the unmarried parents' separation, in which case it might be considered a ''separation agreement.''

When a paternity settlement has not been incorporated into a court order or determination of a governmental unit, a substantial risk exists that it will not survive bankruptcy because it does not fall within the ''court order or determination of a governmental unit'' language. For children born of a marriage, an agreement between separated parents providing for child support creates a nondischargeable obligation, whether or not embodied in a court order or determination of a governmental unit. For children born out of wedlock, it may not.

Court-Ordered Obligations Arising Out of Parental Status

Besides orders specifically intended to provide support for a child, individuals are sometimes required to pay various other expenses connected to their parental status, usually related to litigation concerning the child. Courts have sometimes found that these expenses are in the nature of support for the child and, therefore, nondischargeable.

Obligations of Unmarried Couples

The courts of many states have recognized a right to enforce claims against a former cohabitant based upon a variety of legal theories, including enforcement of express oral or written contracts, implied contracts and general equity powers and theories such as quasi-contract, quantum meruit, unjust enrichment and constructive trust. Such cases have involved not only property division but also orders for support of the formerly dependent partner.

If the claim of the party entitled to support was treated solely as one arising out of a contract, the only possible avenues to a nondischargeability finding would be through a determination that there had been fraud or false pretenses on the part of the debtor, or perhaps a willful or malicious conversion of property.

In order to plan and protect against the possible adverse consequences of bankruptcy, the steps that should be taken are much like those that should be taken in the context of a dischargeable marital property settlement agreement. Written agreements between the parties should, from the outset, specify their obligations to each other, and also their interests in property acquired during the relationship. Similarly, in the context of a separation of unmarried cohabitants, obligations for future support or property transfers could be secured by a mortgage or other nonavoidable security interest in the potential debtor's property. If that were done, the obligation would be given preferred status in the bankruptcy case and, if not paid in the bankruptcy case, would generally remain enforceable against the collateral.

Obligations to Stepchildren, Grandchildren, Foster Children, and Other Persons Supported by the Debtor

A debtor may have people dependent upon him or her other than a child or spouse. The debtor may support family members such as aging parents or grandparents, grandchildren, stepchildren, or foster children. Usually, such support is voluntary and not required by law. Adhering to the ''plain language'' doctrine usually followed in interpreting the Bankruptcy Code, courts are unlikely to broaden the exception to discharge pertaining to support of a spouse, former spouse, or child to include other dependents of the debtor. When substantial sums of money are involved, one device that might be considered to meet both the payor's desire to provide support and the payee's right to continued receipt of the support is the establishment of a trust. Property in a valid trust would not become property of the bankruptcy estate in any subsequent bankruptcy case of the payor.