As we covered in a previous divorce blog, there are many factors to be considered by a person who is thinking about filing for bankruptcy before or after divorce. If you are considering filing bankruptcy before or after divorce, or if you suspect that your former spouse may file bankruptcy before or after divorce, it is necessary to know how property, divorce payments, child(ren) and family are impacted by the bankruptcy. Specifically, it is important to understand which support and property settlement payments may or may not be discharged by the Bankruptcy Court.
If an individual files chapter 7 or chapter 13 bankruptcy, there are two general rules which hold true for bankruptcy and property issues as well as bankruptcy and child support arrangements. First, the state court does not have the authority to unilaterally make family support payments and/or divorce payments dischargeable in a bankruptcy. The bankruptcy courts are ruled by federal bankruptcy laws, which specifically define the rules for bankruptcy and divorce, as they relate to both bankruptcy and family support payments as well as bankruptcy and property settlements.
Divorce is handled in state court and governed by state laws. The state court can enter a divorce decree, but the state court has no authority whatsoever to determine whether a joint or individual marital debt to a third party creditor is dischargeable or non-dischargeable. The bankruptcy court has total power to determine whether or not a debt is dischargeable to a third party.
Second, according to bankruptcy laws, divorce payments that are support payments as defined by the bankruptcy court, cannot be discharged by the bankruptcy court under either chapter7 or chapter 13. That means if a debtor has been divorced and has been ordered to pay alimony support or child support, that debtor must understand that regardless of what happens in the bankruptcy, the debtor remains responsible for the family support payments of alimony and child support. This is true about not only the ongoing and future payments, but also the support arrears. In a chapter 13, a debtors arrears will be included in the chapter 13 repayment plan as a domestic support obligation and will take priority over other creditors claims. Ongoing and future payments are post-petition debts and are not discharged in bankruptcy and/or included in a debtors repayment plan. In fact, while in a chapter 13 repayment plan, the debtor must keep all ongoing and future family support payments current or risk having their bankruptcy petition dismissed by the bankruptcy court. In many instances, a debtor will have their ongoing family support payments debited out of their paycheck through an Employment Deduction Order or garnishment, so that there is no question of whether they are current.
What confuses divorcees the most is the scenario when parties divorce and one party, particularly the party filing bankruptcy, is ordered to pay specific marital debts to third parties. For example, consider the scenario where a husband and wife have a joint charge card with American Express. The divorce court decides that the husband should be responsible and pay for the American Express debt as part of a support obligation to the wife. Sometime after the divorce, the husband may have experienced a financial hardship and needs to file for bankruptcy. The bankruptcy court can discharge the husbands direct obligation to American Express, but it cannot discharge his support obligation to the wife.
Therefore, while the husband no longer owes money to American Express after his bankruptcy discharge, if American Express comes after the wife for non-payment, the husband will owe the wife payment of the American Express debt. The only way that the husband would be relieved of his family support payment obligation to the wife would be if the wife had also filed bankruptcy and discharged the same American Express debt. This is because in this scenario, both parties have no obligation to American Express because of their respective discharges in bankruptcy court and therefore there would be no debt owed by the wife to American Express upon which the husband would be responsible.
To add further confusion to the mix, the bankruptcy court treats divorce and property settlements differently than divorce and support settlements depending on whether it is a chapter 7 or chapter 13.
In a chapter 7, divorce property settlements cannot be discharged. Referring back to our example, if the husband was ordered to pay off the American Express credit card as part of division of property in a divorce decree, the husband will not be able to discharge his obligation to American Express in a subsequent bankruptcy, even though the husbands obligation is part of property and not a family support payment.
In a chapter 13, some districts will allow a former spouse to discharge an obligation that was a property settlement. So if our husband lives in one of these districts, he would be able to file for bankruptcy and his obligation to pay the American Express credit card pursuant to the divorce and property settlement would be treated as an unsecured, non-priority debt. In a chapter 13, priority debts must be paid in full whereas unsecured debts often do not have to be paid in full.
The most important thing a debtor can consider when thinking of filing for bankruptcy before divorce or bankruptcy after divorce is making sure that they have spoken with qualified bankruptcy and divorce professionals to ensure that they are aware of all of their rights and responsibilities under the applicable federal and state laws.
[For additional reference, the key code sections which control the topics discussed in this blog are: 11 USC 523(a)(5) and (15), which state: (a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt–(5) for a domestic support obligation; (15) 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].
Eileen J. Shuman contributed to this blog. She is a family law attorney in Atlanta and a partner at Shuman & Shuman, P.C.. She can be reached at [email protected]