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How Will A Bankruptcy Affect My Divorce Obligations?
A divorce Judgment or Agreement establishes the parties' mutual rights and responsibilities, to each other and to children of the marriage. Bankruptcy law is limited in its ability to affect an obligation arising from a divorce judgment or agreement.
September 08, 2011 /Law and Legal PR News/ -- How Will A Bankruptcy Affect My Divorce Obligations?
A divorce Judgment or Agreement establishes the parties' mutual rights and responsibilities, to each other and to children of the marriage. Bankruptcy law is limited in its ability to affect an obligation arising from a divorce judgment or agreement.
PAYMENTS IN THE NATURE OF SUPPORT -
I. Alimony and Child Support
Child support and alimony awards are considered orders in the nature of support and under the 2005 bankruptcy revisions (BAPCPA) are given complete protection in favor of the supported spouse and minor children. Bankruptcy will not affect the payer's obligation to pay, in either Chapter 7 or Chapter 13. In fact, even the automatic stay (forbidding collection actions during the bankruptcy) does not apply to these items. The ongoing obligation to make payments as scheduled is not affected, even during the time when the bankruptcy case is open. The only remedy for a child support order that is impossibly high for the responsible spouse to pay is a motion for modification in the probate court. Child support orders always remain subject to the probate court's continuing jurisdiction. Alimony orders contained in a Judgment or Agreement that survives the divorce as an independent contract are more problematic for the spouse who can't afford to pay, as bankruptcy will not affect the obligation.
II. Debts to Third Parties
Sometimes a divorce judgment or agreement will require one of the parties to undertake sole responsibility for debt incurred by the other. For example, if Husband is required by the divorce judgment to pay $60,000.00 in joint marital credit card debt, this is tantamount to an order to pay that entire debt and relieving the wife of the financial burden. A bankruptcy filing by the Husband will usually not "discharge" his responsibility to pay this debt. Courts usually (but not always) interpret these provisions as an alternative form of spousal support. Instead of ordering the payment of money to the Wife, the court requires the Husband to relieve her of this debt obligations. In our hypothetical, a bankruptcy filing by the Husband does not satisfy the divorce order requirement that he pay the $60,000.00 credit card debt on behalf of the Wife. While the bankruptcy filing discharges the husband from his personal liability to the credit card companies, the $60,000.00 debt would remain a legal obligation of the wife. The payment requirement is in the nature of spousal support" and non-dischargeable in Bankruptcy. Therefore, the Husband would have an obligation to pay any judgment obtained against the wife, as a non-dischargeable debt to the Wife in accordance with the Divorce Agreement. Of course, if the wife files bankruptcy, the credit card debt is discharged as against the wife and the husband's obligation on his filing would be truly discharged.
III. Other Payments Deemed Support
Some divorce judgments or agreements require one spouse to provide contractual benefits to the former spouse or children such as health insurance, life insurance, and contribution to educational expenses of the children. There provisions are most commonly deemed to be in the nature of support orders. Generally, they are not dischargeable in either Chapter 7 or Chapter 13. However, these provisions are more closely reviewed on a case by case basis and the language of the judgment or agreement can contain subtle differences that may give a different outcome as to dischargeability.
PROPERTY SETTLEMENT ORDERS AND AGREEMENTS
Unlike orders in the nature of support, Property Settlement Orders and Agreements can be reduced or eliminated in a Chapter 13 Bankruptcy. A Property Settlement Order or Agreement is payment (or a buyout) of the ex-spouse's interest in marital property.
As an example, if the Divorce Agreement provides for transfer of the marital home to the Wife and the Wife's buyout of the the Husband's interest in the home at some future date the payment due the Husband can be treated as unsecured debt in a Chapter 13 Plan. As such it can be reduced or even eliminated in full, since the plan payment is based on the Debtor's disposable monthly income, not the amount due to creditors. Any unpaid balance of the debt at the end of the Chapter 13 Plan will be discharged. This is important when a property division payoff is more than the debtor spouse can afford due to a change in circumstances, job loss, or inability to refinance the home due to declining property value. By filing a Chapter 13, the obligation to pay the spouse off can be retired in a 3 or 5 year plan, based on the debtor spouse's ability to pay. At the end of the plan, any remaining balance due on the property settlement obligation is discharged as with other unsecured debt.
CONCLUSION
If you are paying or receiving money resulting from a divorce judgment or agreement, Chapter 7 will not have any effect on your rights or responsibilities. If you are making payments periodically, or in a lump sum at some future date, as part of a division of marital property in a divorce agreement, a Chapter 13 bankruptcy filing can still provide a significant reduction or even elimination of the payment obligation.
Article provided by Nashawaty & Rand
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