Bankruptcy & Divorce Judgments

by Beverly Bird

The Bankruptcy Abuse Prevention and Consumer Protection Act, enacted in 2005, made sweeping changes to the Bankruptcy Code, including provisions for divorce-associated debts. Before 2005, bankrupt debtors were able to discharge certain marital debts, but the BAPCPA closed many of these doors.

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Support Obligations

The BAPCPA had no effect on domestic support obligations – they were incapable of being discharged before the legislation and remain so. Section 523(a) of the Bankruptcy Code prohibits discharge of family support obligations. This includes alimony and child support, either payable to your ex or a third party on your child's behalf. It includes repayment obligations to the state if your family received public assistance; the government is recapturing some of this money from your support payments. This rule applies to both Chapter 7 and Chapter 13 proceedings.

Payment of Arrears

Chapter 7 bankruptcies involve the trustee selling or liquidating a debtor's non-exempt assets for payment to creditors, and past due support obligations are a priority claim among creditors. They receive receive payment first. If insufficient assets exist to pay support arrears – and this is the case with many Chapter 7 bankruptcies, often called "no-asset cases" – family support debts are still due and payable after all other eligible debts are erased. Chapter 13 bankruptcies involve the debtor entering into a three- to five-year repayment plan to satisfy his debts. His plan will not be confirmed or approved by the court if he owes past due support and the plan doesn't include provisions for payment. Unlike unsecured debts, domestic support arrears must be paid off entirely over the life of the plan. A Chapter 13 debtor cannot receive a discharge when his plan is completed unless he's current with support obligations.

Marital Debts and Property Distribution

If your divorce judgment requires you to pay off marital credit cards, filing for Chapter 7 bankruptcy won't release you from this obligation. The same applies to property settlement obligations, such as an agreement to pay your spouse $50,000 for her share of the equity in the marital home. These debts are typically dischargeable in Chapter 13 proceedings, however, as long as they're not associated with and can't be construed as support. Marital debts other than support are paid last in a Chapter 13 plan, behind secured and other priority creditors. If they're not paid off completely at the end of the plan, the balance can be discharged. Innocent spouses can include hold harmless or indemnification language in their divorce judgments or agreements to protect against this eventuality. Creditors can look to the other spouse for payment of co-signed debts when one spouse's obligation is discharged, but hold harmless provisions allow an innocent spouse to seek compensation in family court if she must pay any debts assigned to the other in a divorce judgment.

Timing Issues

Before the passage of the BAPCPA, it was more advantageous for debtors to wait until after divorce to file for bankruptcy, particularly Chapter 7. A debtor could ultimately discharge any debts he took on pursuant to the divorce judgment. This is no longer the case, but filing for bankruptcy too soon can create divorce complications as well. Bankruptcy is overseen by federal court and divorces are governed by state courts. Federal proceedings take precedence over state proceedings. Therefore, issues of property division and marital debts are effectively put on hold in a divorce until the bankruptcy trustee can address them and make a disposition regarding what becomes of them. This may delay your divorce.