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 marital debt incurred by the other. A bankruptcy filing by the responsible party will usually not eliminate or “discharge” this debt. Courts usually (but not always) interpret these provisions as an alternative form of support, especially if the entitled spouse is deemed to require support due to low income, disability or some other valid reason. Instead of ordering the payment of money to the entitled spouse, the court requires the responsible spouse to relieve the entitled spouse of certain debt obligations. For example, if a 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 50% of that debt on behalf of the wife. Without the divorce obligation, either party could be sued and required to pay a judgment for the entire $60,000.00 credit card debt. The parties are “jointly and severally liable” if the cards are in both of their names. The spouse being sued would have a corresponding right to sue the other spouse for a “contribution” to payment of the judgment. In our hypothetical, a bankruptcy filing by the husband does not satisfy the divorce order requirement that he “hold harmless” the wife from any obligation on the card debt. While the bankruptcy filing discharges the husband from his personal liability to the credit card companies, the $60,000.00 debt remains a legal obligation of the wife. The hold harmless provision would be deemed, in most cases, to be “in the nature of support” and non-dischargeable in Chapter 7. Therefore, the Husband would have an obligation to satisfy any judgment subsequently obtained against the wife, as a non-dischargeable debt to the Wife in accordance with the Separation Agreement (not based on the credit card contract). Of course, if the wife files bankruptcy, the hold harmless becomes moot because the debt is discharged as against the wife and there is no debt remaining from which to hold her harmless. In a Chapter 13, the hold harmless provision may be dischargeable if the Bankruptcy Court finds that the provision is actually in the nature of a division of property, as will be discussed below.
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
If one party is required to pay money to the other as compensation for division of marital property, the obligation is not as well protected from a Chapter 13 bankruptcy filing as spousal support or child support. Again, under Chapter 7, because it is a debt arising out of a divorce judgment or agreement, the debt is non-dischargeable and will not be affected by the Chapter 7 filing.
However, in Chapter 13, a property settlement judgment or agreement can be affected by a Chapter 13 Plan. It can be reduced or even eliminated. Moreover, any unpaid balance will be discharged after completion of the plan. This is important when a property division payoff is more than the debtor spouse can afford, due to a change in circumstances such as job loss or inability to refinance the marital home due to a decrease in the property’s value. Even absent a change in circumstances, some divorce agreements provide periodic or lump sum payments at some future date as an affordable method of property division. By filing a Chapter 13, that obligation 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 on the property settlement obligation is discharged along with most other unsecured debt. Even a hold harmless provision requiring one spouse to pay the outstanding debt of another to third parties (except the spouse’s attorney) can, in some cases, be found to be more in the nature of a division of property and dischargeable in Chapter 13.
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 receiving payments periodically, or in a lump sum at some future date, as part of an overall division of marital property, a bankruptcy filing by the paying spouse under Chapter 13 can still provide a modification or even elimination of the payment obligation as part of the Chapter 13 plan.
