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socrateaser
socrateaser, Attorney
Category: Bankruptcy Law
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Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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Unknowingly I have not paid my ex spouse almost 20 years worth

Customer Question

Unknowingly I have not paid my ex spouse almost 20 years worth of a divorce decree property settlement that involved 42% of my military retirement pay. The principal alone will be approximately $250k. She has an attorney to negotiate with me a settlement. My annual salary is approximately $100k. I have nothing in personal savings but I do have $350k in an ERISA 401k. My California home was just refinanced and there is little or no current equity. I am 57 years and plan to work another seven years and then retire. I have no other monthly consumer debt. If ordered by the court to pay this estimated $250k amount, would I qualify for Chapter 13 bankruptcy when I can't afford it.
Submitted: 10 months ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 10 months ago.
Hello,

Ordinarily, a 401(k) account cannot be reached to satisfy a creditor claim in bankruptcy. But, your claim is one for a court-ordered division of community property, belonging to your ex spouse. Consequently, the account can be reached via a QDRO to obtain the $250K that you owe.

In Chapter 13, a debt owed to a spouse in connection to divorce, other than for child or spousal support, can be discharged at the end of a fully-paid Chapter 13 plan. Bankr. Code 1328(a)(2). However, the question here is whether or not the property that you hold is part of the bankruptcy estate, or the property of your ex.California law imposes a constructive trust over property wrongfully withheld from its owner. Cal.Civ. Code §§ 2223, 2224. However, federal bankruptcy law includes such property in the bankruptcy estate, unless it can be directly traced to the creditor's property. In re Advent Management Corp.104 F. 3d 293 (U.S. 9th Cir. 1997).

Consequently, if your ex could trace your property to the original community property division, she could have that property excluded from the bankruptcy estate and turned over to her, regardless of your bankruptcy filing. If not, then the debt would be discharged as part of the Chapter 13, assuming that you complete the bankruptcy plan.

There is one other issue here. In order to qualify a Chapter 13 plan, your unsecured creditors must receive as much as they would during the bankruptcy plan, as they would receive were you to file Chapter 7 bankruptcy. Consequently, if you have little debt, other than the debt to your ex, then given that the 401(k) is not exempt from a domestic relations order, and it can be reached to pay the judgment originally ordered by the court, via a QDRO, you may not be able to protect that money in bankruptcy, and as a result, You will not be able to confirm a Chapter 13 plan that will avoid your ex's claim.

This is an accounting problem. You will have to have a bankruptcy lawyer run the numbers to see if filing Chapter 13 would have a beneficial effect. If yes, you probably can discharge the debt to your ex, in some amount, because tracing the assets may be impossible after 20 years. But, if your assets exceed your debts, when counting the 401(k) as an available asset to satisfy your ex's claim, then the Chapter 13 plan will not be confirmed, and the entire exercise will be a wasted effort.

What I'm describing here is an unusually complex bankruptcy law scenario. However, I believe my analysis and conclusion is correct. You will need to discuss this thoroughly with local bankruptcy counsel before making a decision.

Please let me know if my answer is helpful. And, thanks for using justanswer.com!

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