Saturday, January 2, 2010

Ex-Spouse Ordered to Turnover Unpaid Divorce Decree Obligations to Trustee Despite Inability to Pay

In Gallo v. Emery, 573 F.3d 433 (7th Cir. 2009), debtor initiated a chapter 13 bankruptcy case after the completion of state court divorce proceedings. The divorce court had required debtor’s ex-spouse to pay debtor $125,000 under the Illinois circuit court’s dissolution judgment. Debtor’s ex-spouse did not pay the judgment amount prior to debtor filing bankruptcy.

After filing bankruptcy, debtor filed a motion under §542(b) seeking an order requiring the ex-spouse to pay the chapter 13 bankruptcy trustee the amount that the ex-spouse owed debtor under the Illinois circuit court’s dissolution judgment. The ex-spouse opposed the motion on the ground that the ex-spouse did not have the ability to pay the $125,000. The bankruptcy court rejected the ex-spouse’s argument and entered an order directing the ex-spouse to pay to the trustee the $125,000. The district court affirmed.

The issue before the 7th Circuit was whether the bankruptcy court erred in ordering the ex-spouse to turnover the $125,000 to the chapter 13 trustee despite the ex-spouse’s alleged inability to pay the $125,000. The ex-spouse argued that the bankruptcy court erred in ordering the turnover because the court failed to establish that the ex-spouse had the ability to pay the payment.

The 7th Circuit affirmed the bankruptcy court’s order requiring the turnover of funds. The 7th Circuit held that the bankruptcy court had no obligation to ensure the ex-spouse’s ability to pay the judgment before granting the turnover motion. The 7th Circuit distinguished between turnover motions and contempt of court motions; the inability to pay is not defense to a turnover motion, but the inability to pay could be a defense to a later contempt of court motion.

Warmest Regards,

Bob Schaller

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By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm
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