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Can a same-sex couple in South Carolina file bankruptcy together?

By Columbia – Lexington Bankruptcy Attorney Lex Rogerson

While South Carolina law does not recognize marriage between two persons of the same gender, the answer is now a qualified yes.

Two women.optimizedUnder the Bankruptcy Code, only spouses can file joint bankruptcy cases. But with laws in various states differing so much the legal status of same-sex marriage, what determines whether two men or two women who have exchanged vows will be considered married? The answer is not yet entirely clear, but recent developments appear to open the door for couples who are considered married by any state to file jointly.

Here’s how this issue evolved.

The first attempts

In 2003, Ann Kandu and Lee Kandu of Castle Rock, Washington, filed a joint bankruptcy petition under chapter 7. The two women had participated in a wedding ceremony in Canada, but their home state did not recognize the marriage.  In fact, no state then permitted two persons of the same gender to marry.

The U.S. Trustee, an officer of the Department of Justice, moved to dismiss the Kandus’ case, citing the Defense of Marriage Act (DOMA). Section 3 of this federal law, enacted in 1996 when states first began considering same-sex marriage, provided that whenever a federal law uses the terms “marriage” or “spouse,” it can only refer to the union of a man and a woman. Since the Bankruptcy Code is federal law, including section 302 that authorizes spouses to file jointly, the bankruptcy court agreed that Ann and Lee were not spouses and dismissed their case.

Over the next seven years, five states and the District of Columbia began to allow same-sex marriage, while others started recognizing such marriages performed legally out-of-state. In 2010, two New York women who had married in Vermont, where such marriages are permitted, filed a joint bankruptcy petition. New York, while not then permitting such marriages, nevertheless recognized ones celebrated in states where they were legal. By that time, the Justice Department had decided not to defend the constitutionality of DOMA, but the case trustee moved to dismiss the case. The bankruptcy court did not decide whether DOMA was valid, but it ultimately refused to dismiss, holding that joint administration was in the best interest of creditors.

In early 2011, a Los Angeles couple confronted DOMA more directly. Gene Balas and Carlos Morales had been legally married under California law before a referendum called Proposition 8 prohibited such unions. In response to a motion to dismiss, the bankruptcy court found that DOMA denied due process and equal protection rights to those in the debtors’ position. It concluded there no compelling justification for denying legally married same-sex couples the same right to file joint bankruptcy as other married persons. Additionally, the law failed even under looser standards of review because there was no rational basis for treating the two classes of married people differently.

The Windsor case

Bankruptcy was not the only field on which this battle was fought. In fact, DOMA affected over 1,000 federal laws that turn on marital status. A quite different one gave rise to the definitive decision on federal recognition of same-sex marriage. United States v. Windsor, 133 S.Ct. 2675 (2013).

Edith Windsor and Thea Spyer were legally married in Ontario and returned to their home in New York, which recognized the marriage. Thea died in 2009, leaving all of her considerable property to Edith. Edith applied for the marital exemption from estate tax, which would allow her to avoid over $360,000 in inheritance taxes. The IRS refused to allow the exemption, claiming that because of DOMA, she did not qualify as a surviving spouse. Edith then filed suit in federal district court asserting that DOMA in effect institutionalized discrimination against those in same-sex marriages. After she won in the lower courts, the US Supreme Court agreed to hear the case.

In a closely divided result announced in June 2013, the Court struck down section 3 of DOMA. It first recognized that regulation of marriage has long been considered the “virtually exclusive province” of state law. While DOMA did not purport to overrule the decisions of sovereign states on who may marry, it did “identify a subset of state-sanctioned marriages and make them unequal.” Because DOMA was expressly intended to interfere with the equal dignity of same-sex marriages under state law, it violated the basic due process and equal protection principles applicable to the federal government. To hear Justice Kennedy’s announcement of the majority opinion, click here.

What happens in South Carolina?

In June 2014, Illinois will become the 17th state to allow same-sex marriage. At least one other — Oregon — recognizes such marriages performed elsewhere. What happens if such a couple moves to Columbia or Lexington or Aiken and tries to file a joint bankruptcy?

In response to Windsor, the U.S. Trustee program has changed its policy on joint bankruptcy filings. In February 2014, it announced that it considers people to be spouses if they are legally married under the law of any state, even if the state where they live does not recognize the marriage.

While this policy governs the agency primarily responsible for determining eligibility, as well as the trustees assigned to a particular case, the agency acknowledges it does not apply to all participants in the bankruptcy process. So in a state like South Carolina, a creditor could conceivably move to dismiss a same-sex joint case, arguing that the debtors are not legally married.

The outcome of such a challenge would be uncertain, as there is no clear answer whether a state must recognize a same-sex marriage contracted elsewhere. But one would expect such challenges to be rare.  Creditors have little practical reason to care whom debtors marry as long as they comply with the requirements of the Code. In addition, while filing jointly can have definite advantages for debtors, creditors would be treated much the same if one or both spouses were to file separately. Creditors, then, would seem to have little incentive to incur the cost of litigating this issue.

So while there are no guarantees in this evolving area of the law, the chances are good that a same-sex couple who marries legally in another state and then moves here could complete a joint bankruptcy case in the District of South Carolina.


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