The division of property in an Illinois divorce is a significant issues. For the most part divorce, custody, child support and other family law issues are resolved primarily by looking to state statutes and state cases. However, federal law can have significant impacts on family law as well. Take, for instance, the recent Seventh Circuit case of Harshaw v. Harshaw.

The Seventh Circuit is particularly relevant in Illinois because their decisions control the district courts in Illinois. In Harshaw, an arbitrator in an Indiana divorce case awarded the wife $435,000 from the husband, due to the value of the husband’s retirement account. However, the arbitrator did not award her part of the retirement account specifically, but entered a judgment in her favor against the husband for that amount. The husband then declared bankruptcy.

Typically support obligations are not dischargable in bankruptcy. Interests in property awarded pursuant to a divorce may not be subject to discharge as well. The goal is to insure the property you are awarded in an Illinois divorce actually gets to whom it was awarded. The specific character of the award, however, is critical under federal law. In this case, the federal district and appellate court held that the award was not an award of interest in a property, but was a money judgment. As a money judgment, the award was subject to being discharged in a bankruptcy. Further, since the asset that the arbitrator had based the award on was in a protected retirement account, that account was not considered part of the bankruptcy estate and was exempt from attachment.

In sum, due to the failure of the arbitrator to be aware of the impact of federal bankruptcy laws, one party to the divorce ultimately will receive substantially less (by about $450,000) than their fair share of the marital estate as determined by the state court in Indiana. Perhaps the most important thing for attorneys to remember regarding this case is the statement by the court that a declaration that an amount is not dischargable is not, in and of itself, the basis for making something non-dischargable in bankruptcy. Federal bankruptcy law controls the characterization of the obligation and a specific statement to the opposite in a state court order does not change the results under bankruptcy laws.

This case represents an aberration rather than the most common factor. In most divorce cases in Illinois, parties seek and are awarded interests in property, for the most parts. Money judgments may be used for equalization purposes, but are not preferred if they can be avoided. It is better to receive an interest in the form of a part of a divisible account rather than as a money judgment, especially if most of the marital estate would be exempt property in a bankruptcy (like retirement accounts).

For more help or information on obtaining a fair and equitable distribution of property in your McHenry County, Illinois divorce, please contact us.