Divorce, Bankruptcy and Discharging Debts

Debts for equitable distribution are sometimes dischargeable in Bankruptcy

In divorce cases, the term ‘equitable distribution' means dividing up property and debts in a way that is fair between two people who no longer will be married to one another.

Many of our clients are surprised to learn that some debts arising out of divorce may be capable of being discharged in a bankruptcy case.

Equitable distribution of property acquired during a marriage may be discharged in a Chapter 13 case but NOT in a Chapter 7 case.

The key take away is to be certain the debt everyone thinks is equitable distribution of property is not actually for alimony, or child support for maintenance.  This is because a bankruptcy judge must make an independent decision about whether or not the debt can be discharged in a bankruptcy case even though the judge hearing the divorce case and the former couple may have decided what these debts are for and what they were negotiated to accomplish.

Most post-divorce debts one former spouse owes to the other ex-spouse are either (a) domestic support obligations, i.e. alimony, child support, maintenance (including reimbursement of governmental support) or (b) equitable distribution or an adjusting of paying for property, handling joint debts to others such as car loans, mortgages or credit card debts.

Bankruptcy Courts discharge or cancel (wipe out) alimony or child support debts under any Chapter of the Bankruptcy Code. In fact, the Bankruptcy Code gives these obligations the right to be paid ‘off the top' or a higher priority than many other types of debt.

Alimony and child support are very important in Bankruptcy.   Before anyone who files a bankruptcy (whether Chapter 7 or Chapter 13) may get a discharge of other non- domestic support debts like alimony or child support, they must file a sworn statement certifying they either are current with support or alimony payments, have made arrangements to become current or have no domestic support obligation. Without this important statement, there can be no discharge.

How do we know when a debt or obligation (like paying for health insurance or school tuition for a child) is a domestic support obligation?

 Sometimes a property settlement may be agreed on or court ordered in the divorce court but looks like equitable distribution of property. Very often, a division of property at the time of a divorce is designed to achieve the same goals as alimony or support.  At the time the soon to be ex- spouses sign a marital settlement agreement or a judge orders them divorced and property divided up, bankruptcy is usually not in the picture.

The law can be a little tricky sometimes depending on the facts.

One example is when one spouse buys out the other spouse's interest in the family business by regular payments over time. Some bankruptcy Courts decided that the (debtor's obligation to make regular payments to his former spouse in lieu of her interest in debtor's business was contemplated to allow former spouse to meet necessary living expenses and was found to serve a support function). Here, discharge of this debt was denied.

Another example is when a debtor's assumption of the obligation to pay second mortgage on marital residence was considered support because it was intended to facilitate maintenance of dependent former spouse's housing.

Do you want to know more? I invite you to call me at 908 782 9333.