Your Ex-Spouse and Discharging Divorce Debts in Bankruptcy

Divorce is one of the top three events causing a bankruptcy filing. The other two are  income loss and medical problems. Debt owed to an ex-spouse may help determine the chapter of relief you select when you file for bankruptcy. When the Bankruptcy Code was amended in 2005, a couple of provisions were added that very broadly excepted debts arising from a divorce proceeding from discharge. Here are some general rules you need to know.

Domestic Support Obligations Can Never Be Discharged in Bankruptcy

Domestic support obligations, also called a DSO, can’t be discharged in either a Chapter 7 or a Chapter 13. See 11 USC 523(a)(5). These are support obligations owed to your ex-spouse for either spousal support or child support. Sometimes a party to a divorce is ordered to pay a former spouse’s credit card or attorney fees. Payments to third parties for the benefit of your ex can also be support depending on the circumstances, e.g., the wife was a stay-at-home mom and had credit card debt but no job to repay it so the husband is ordered to pay it.  This could very well be considered a support obligation and not a property settlement.

Property Settlements Cannot Be Discharged in a Chapter 7

11 USC 523(a)(15) excepts any divorce property settlements from discharge. Any debt owed:

to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit;

So that’s that. Basically any debts owed to an ex-spouse in a Chapter 7 aren’t discharged. Nothing needs to be filed. They are just automatically non-discharged. This includes any “hold harmless” provisions.

Property Settlements and the Chapter 13 Super Discharge

However, property settlements can be discharged in a Chapter 13.Check out  11 USC 1328(a)(2) which gives a list of debts that are not discharged in a Chapter 13. 11 USC 523(a)(15) isn’t mentioned. What does that mean in plain English and not legalese? Property settlements can be  discharged in a Chapter 13 when the repayment plan is successfully completed. If your case is dismissed or converted to a Chapter 7, the property settlement owed to the ex-spouse remains.

Before you jump into a Chapter 7, consider filing a Chapter 13 if you owe a property settlement to an ex-spouse which you cannot afford to repay without help.

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photo by: Steve Snodgrass

Child Support, Spousal Support, and Bankruptcy.

It is not uncommon for divorced people to file bankruptcy after their Judgment of Divorce is entered. Your household income has been reduced from two wage earners to one and each person is paying, and not sharing, household living expenses. Perhaps you have to pay child support now or maybe even spousal support. Your household income has gone down and your expenses have gone up. It’s a recipe for financial disaster and lot of people here in Michigan consider bankruptcy as an option to help eliminate credit card and debt expenses. It just makes sense.

While bankruptcy can discharge most, if not all of your debt, there are some debts that cannot be discharged. Child support and spousal support are considered domestic support obligations (DSO.) Domestic support obligations cannot be discharged or modified in either a Chapter 7 or Chapter 13 bankruptcy. This is exempted from discharge by statute: See 11 USC. 523(a)(5). However,  you are behind in your support payments, you can use a Chapter 13 to help you catch up on your arrears owed for back support.

Child support and alimony are both priority unsecured debts. An unsecured debt is one in which there is no collateral or security interest to secure the debt, for example, a home loan is secured by a mortgage. The priority is that they are to be paid first before your run of the mill unsecured debt like Visa or Master Card.

The impact a bankruptcy will have on support payments differs on whether it is a Chapter 7 or a Chapter 13. If it is a Chapter 7, there will be little impact on the support payments. A Chapter 7 bankruptcy will not stop the collections, enforcement, or payment of support. A Chapter 13 is different because the debtor’s future wages are property of the bankruptcy estate. The Chapter 13 debtor then comes up with a plan as to how all of the creditors will be treated. That plan will include how the payment of child or spousal support will be accounted for. Support payments may be temporarily stopped until these play payment details are worked out.  However, once the Chapter 13 plan is confirmed, if the debtor fails to pay any post filing support payments, the debtor’s case may be dismissed or converted.  See 11 USC 1307(c)(11).

Once the bankruptcy case is over, whether by discharge or dismissal, any support obligation remains.

Image by Stewf.