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.

“X” also stands for:

 

photo by: Steve Snodgrass

“J” Is For Joint Bankruptcy Filing

Green JayMost married couples do most everything together but that doesn’t mean they want to file a joint bankruptcy together. Well, they don’t have to. Just because one files, it doesn’t mean that the other has to. A married couple will have to decide before the case is filed whether or not they will file a joint case. While most of my married clients file jointly, not all do. There are pros and cons to each to consider.

Benefits of a Joint Bankruptcy Filing.

The cost is the same whether you file joint or single. If your spouse wants to file later, I will happily charge you and your spouse twice. Remember, once the case is filed, you can’t jump back in. A joint case is cheaper than separate cases.

It eliminates all individual and joint debt. If your spouse doesn’t file, they will be remain responsible for their individual and any joint debt. Since married couples are economic units, eliminating half the debt in the house probably isn’t the best fresh start it could be.

You only need to do the credit counseling courses once. A debtor must do a pre-petition credit counseling course before they file and a post-petition debtor education course to get their discharge. A married couple does the courses together which saves time and money.

It’s less paperwork. Whether you file jointly or singly, I will pretty much need the exact same things: Tax returns, bank accounts, deeds, etc. Even if your spouse doesn’t file, I will need their pay stubs and budget the household income and expenses.

If you are eligible for a Chapter 7, so is your spouse. The bankruptcy court reviews household income and expenses to determine whether you can file a Chapter 7 or a Chapter 13. If one spouse is eligible for a Chapter 7 based on household income, so is the other.

Disadvantages of a Joint Bankruptcy Filing.

One spouse owns too much non-exempt property. I recently had a case where both spouses wanted to file but the wife owned some land in northern Michigan. It had been in the family for a long time and was owned free and clear. If she filed, she would not have had enough exemptions to protect the real estate. The trustee would have administered the property for the benefit of the creditors. He filed. She didn’t.

Credit is damaged for both filers. Sometimes one spouse has little or no debt. Sure it would be nice to have bankruptcy wipe out the debt but if one spouses debts are manageable and not overwhelming, perhaps having one spouse with good credit is worth the trade off.

Divorce is on the horizon. Sometimes financial problems and divorce go hand in hand. If you are a married couple considering divorce, consider filing bankruptcy after the divorce if you are not a joint Chapter 7. You may both be a Chapter 7 after a divorce but a Chapter 13 while married. Even if both of you would be a Chapter 13 after a divorce, would you really want to be in a repayment plan with your ex-spouse? Probably not.

“J” also stands for:

Christopher McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people in the  Downriver area  file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info.

 

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.

What Comes First: Bankruptcy or Divorce?

When considering both, the first issue is timing. Should you file it before, during, or after the divorce? A married couple, even if not living together, can file a joint case. You cannot file jointly after the divorce is over even if the debts you are looking to discharge are joint debts. Some of the advantages of filing before: Elimination of all debts which will reduce arguments over who pays for what; Paying for only one bankruptcy and not two; Making a spouse who would not be eligible for filing for a Chapter 7 eligible by using a larger household size.

If the bankruptcy petition is filed during the divorce, the divorce action is stopped in its tracks in regard to any property settlements. All property of the debtors is property of the bankruptcy estate and cannot be divided up in any property settlement until either the bankruptcy is over or permission is received from the bankruptcy judge. This automatic stay does not apply to child support, spousal support, or custody and parenting time but only to property division. While it may be necessary to file during a divorce, it can slow things down.

If you file a Chapter 7 after the marriage is over, you should know spousal support, and child support are never dischargeable. You may not be able to discharge any attorney fees you owe to your former spouse’s attorney. You may also have a problem if you have any “hold harmless” agreements in the Judgment. An example of a hold harmless clause is when a husband is ordered to pay a credit card bill that is only in the wife’s name. You can discharge property settlements only in a Chapter 13 but not a Chapter 7. Confused yet? It gets tricky figuring out what is property and what is support.

Every family is different and so are their needs. If you are getting a divorce, it may be nice to get a fresh financial start as well.