Chapter 13 and Divorce: When Does Automatic Stay Terminate as to Property Division

Chapter 13 Bankruptcy and Divorce: When Does Automatic Stay Terminate as to Property Division

Most chapter 13 bankruptcy plans last five years. That is time for major changes to happen in a debtor’s personal life, including divorce. The pendency of a chapter 13 case interferes with filing and maintaining a divorce case. In that situation, some debtors dismiss their chapter 13 cases, and some file motions to terminate the bankruptcy interference. Others choose to wait until the interference terminates towards the end of the bankruptcy case. For those debtors, it is important to know exactly when the interference, in the form of the “automatic stay”, ends. Answering that question requires the examination and coordination of many authorities.

Automatic Stay. 11 U.S.C. Section 362(a) provides: “Except as provided in subsection (b) of this section, a petition filed under section 301, 302 or 303 of this title [a bankruptcy petition] operates as a stay, applicable to all entities”. This section prohibits acts against the debtor, against the property (assets) of the debtor, and against property (assets) of the bankruptcy estate.

An order of a divorce court awarding possession or ownership of property involved in the bankruptcy, or a petition or motion requesting such an order, would be within the purview of Section 362(a).

Property. Property for bankruptcy purposes includes (1) all property owned by the debtor when he filed bankruptcy, (2) certain inheritances and other property acquired by the debtor due to a death occurring within 180 days after he filed his bankruptcy (11 U.S.C. Section 541(a)(5), all property that the debtor acquires before his chapter 13 case is closed (11 U.S.C. Section 1306(a)(1), and (3) debtor’s personal services earnings during his chapter 13 case. A few other things are included as assets in special situations that are not discussed here, for example conversion of cases from one chapter to another.

Assets are either “property of the estate” (meaning the bankruptcy estate) or “property of the debtor”.

Property of the Debtor. Property of the debtor includes (1) assets that are “exempt”, such as household furnishings, clothing, some vehicles, etc., (there are many categories of exempt assets), (2) assets that have been “abandoned” (which is explained below), even if they were once property of the estate, and (3) once the bankruptcy court enters an order of discharge (which wipes out debts), all assets, even if they were property of the estate. The last of these items is demonstrated in detail below.

Property of the Estate. Property of the estate is all property (as defined above) that is not property of the debtor.

Abandonment. Abandonment is the event of property of the bankruptcy estate reverting to being property of the debtor. An asset is abandoned when (1) a creditor (usually a mortgagee needing to foreclose or a vehicle lienholder needing to repossess) has filed a motion and the bankruptcy court has entered an order abandoning the asset (11 U.S.C. Section 554(b), (2) the trustee assigned to the bankruptcy case has filed a motion and the bankruptcy court has entered an order abandoning the asset (often a business or high-maintenance asset that is burdensome) (11 U.S.C. Section 554(a), (3) the debtor has listed the asset in the schedules filed in his bankruptcy and the bankruptcy case has been closed (11  U.S.C. Section 554(c)), (4) the debtor or his spouse, wanting to act against the asset in a divorce case before the bankruptcy law normally allows it, has filed a motion and the bankruptcy court has entered an order abandoning the asset (11 U .S.C. Section 554(b).

Termination of the Automatic Stay. Termination of the automatic stay occurs automatically in some special situations, e.g. when a chapter 7 debtor delays reaffirming a secured debt and when a previous chapter 13 case of a chapter 13 debtor has been dismissed too recently.

More commonly, termination of the automatic stay occurs when a party files a motion and the court enters an order granting relief from the automatic stay regarding an asset. Such a motion is normally utilized by a creditor to allow mortgage foreclosure or vehicle repossession. However, if a debtor or his spouse cannot wait to proceed with divorce until the automatic stay terminates automatically, one of them can file a motion for relief from the automatic stay in the bankruptcy court in order to obtain permission for a divorce court to award possession or ownership of assets.

Termination of the Automatic as to Property of the Debtor. As to property of the debtor (as opposed to property of the estate – see the definition above), the automatic stay terminates automatically when the court enters the discharge order (the order wiping out debt), even if the case has not yet been closed. 11 U.S.C. Section 362(c) provides,  “(1) [T]he stay of an act against property of the estate continues until such property is no longer property of the estate; (2) the stay of any other act under [Section 362(a)] continues until the earliest of – . . . (C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, or 13 of this title, the time a discharge is granted or denied”.  An act against property of the debtor, as stated earlier, is an act under Section 362(a), and it is an act that is other than an act against property of the estate. Therefore, the automatic stay as to acts against property of the debtor terminates upon the entry of discharge.

Termination of the Automatic Stay as to Property of the Estate. As to property of the estate (as opposed to property of the debtor), it is more complicated to determine when the automatic stay terminates automatically. It is necessary to examine several authorities and to tie them together.

11 U.S.C. Section 362(c)(1) provides that “the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate”. This means that the stay terminates as to property of the estate when the property ceases to be property of the estate.

11 U.S.C. Section 1327(b) states, “Except as otherwise provided in the plan or the order confirming the plan, the confirmation of the plan vests all the property of the estate in the debtor”.

The standard plan confirmation order in a Northern District of Oklahoma chapter 13 case (other districts are beyond the scope of this memorandum) provides that property of the estate does not vest in the debtor until discharge is entered:  “Notwithstanding confirmation of the Plan, all property of the estate defined by 11 U.S.C. Section 1306 shall remain property of the estate and shall not revest in the Debtor until a discharge is entered or the case is dismissed.”

11 U.S.C. Section 1306(b) states, “Except as provided in a confirmed plan or order confirming a plan, the debtor shall remain in possession of all property of the estate.” My belief is that the drafters of the standard confirmation order probably intended to refer to Section 1327(b) instead of Section 1306, but, whether or not that is true, it is clear that the order means that the debtors do not recover ownership of property of the estate until the discharge is entered.

When all of these provisions are connected, it becomes apparent when it is that the automatic stay terminates regarding property of the estate.  The automatic stay terminates as to property of the estate when it ceases being property of the estate. It ceases being property of the estate when it vests in the debtor. It revests in the debtor when the discharge is entered in a chapter 13 case. Therefore, the automatic stay terminates as to property of the estate when the discharge is entered in a chapter 13 case.

Conclusion. As demonstrated, the automatic stay terminates both as to property of the debtor and as to property of the estate when the discharge is entered in a chapter 13 case. Therefore, when the discharge is entered in a chapter 13 case, the automatic stay ceases to prohibit a divorce court from entering, or a party from filing a motion or petition requesting, an order awarding possession or ownership of any assets of the bankruptcy debtor.

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Brian Huckabee

Brian Huckabee is a Tulsa, Oklahoma, attorney with a practice concentrated in bankruptcy and business law. He has handled thousands of business and consumer bankruptcy cases in the past three decades, consisting primarily of chapter 7 and 13 cases, but also including numerous chapter 11 business reorganizations. He represents debtors but has credit union and creditor clients. He has served as an Adjunct Settlement Judge in the United States Bankruptcy Court for the Northern District of Oklahoma. He is licensed in all of Oklahoma’s federal judicial districts, but he concentrates in the Northern and Eastern Districts. He is a member of the Bankruptcy Section of the Tulsa County Bar Association. He received a Bachelor of Arts degree with Honors from Oklahoma State University in 1978 and a Juris Doctorate degree from University of Oklahoma in 1981. He has been married for 33 years to a Tulsa attorney, and he has two grown children, one of whom is a Tulsa attorney. He attends Harvard Avenue Christian Church in Tulsa.