Can bankruptcy prevent you from recovering a spouse’s pension?

Bankruptcy can complicate family law proceedings, especially when trying to determine what assets will be distributed. Normally, bankruptcy can be used to shield certain properties from being included in divorce proceedings. However, certain types of assets will not be excluded because of one spouse declaring bankruptcy.

If your former partner declares bankruptcy during divorce proceedings, will that preclude you from being able to recover an interest in their pension benefits?

Brown v. Brown

The Brown case involved a divorced couple fighting over the husband’s military pension. Though he discharged his debts in bankruptcy proceedings, his ex-wife then went after the proceeds from the pension as marital property.

Background

In this case, both Husband and Wife were enlisted in the military, and Husband’s service allowed him to accrue a pension. Six months after Wife filed for divorce, Husband voluntarily declared Chapter 13 Bankruptcy in North Carolina. Wife did not contest this at the time and Husband’s obligations to creditors – including those of Wife – were discharged after he paid over $60,000.

After the bankruptcy proceedings, however, Wife filed a motion to assert a claim to Husband’s military pension. Husband argued that Wife’s interest in the pension was not a property right, but rather a creditor’s claim, and was thus not available to her due to his bankruptcy.

Trial court ruling

The North Carolina court ruled that Wife’s interest in the military pension was considered to be marital property, not a creditor’s claim. The trial court said in part that, because “the military pension was not liquidated or otherwise distributed to any creditor” and that the retirement money “could not be reached by a creditor,” this interest had not been discharged during the bankruptcy proceedings.

Further, the trial court reasoned, because the defendant (Husband) was not receiving the pension during the course of the bankruptcy proceedings, the $60,000 he paid did not include the pension. The defendant was now considering receiving proceeds from the pension that he had accrued during his marriage to the plaintiff. As a result, the pension was not protected by bankruptcy proceedings and Wife had a right to demand equitable distribution of a portion of that pension.

Appeal by the defendant

Husband appealed the initial determination, again arguing that this was a creditor’s debt. The court of appeals affirmed the initial determination that Wife’s claim in the pension was a property right. While Husband argued that another case, Perlow v. Perlow, held that, failing to object to a spouse’s bankruptcy proceedings, their property interest was “discharged along with Mr. Perlow’s other debts.”

However, the court also noted that the facts of the Brown case were very similar to another case, Walston v. Walston, which also concerned the distribution of a military pension. In Walston, the court limited Perlow’s decision by noting that, because the military pension is not dischargeable debt in bankruptcy, the spouse’s interest in the pension was also not discharged in those proceedings.

The appeals court noted that there was no evidence of any abuse in this determination by the trial court and that “defendant has a proprietary interest in the military pension that survives plaintiff’s bankruptcy discharge. Thus, the defendant is entitled to prosecute a claim for distribution of that per se marital property.”

The financial factors involved in a divorce can be complex. The services of a family law firm with experience in resolving such issues can make a difference in your outcome.