When you file for Chapter 7 bankruptcy, the trustee takes possession of your property, then sells assets with any value or equity to raise money to pay off your creditors. Chapter 7 is the strictest form of bankruptcy. Under the terms of the BAPCPA, you are not allowed to discharge debts associated with your property settlement agreement. This includes "hold harmless" clauses in the agreement where you indemnify your ex-spouse against any liability for marital debts you've agreed to pay. If you accept responsibility for them in your agreement, you can't discharge them in bankruptcy.
In a Chapter 13 bankruptcy, the trustee does not pay your debts through liquidation of your assets, but rather with your excess income. The court determines how much money you have left over at the end of the month after paying reasonable and necessary living expenses. You give this money to your trustee, and he distributes it among your creditors. This allows you to discharge more types of debts than if you had filed for Chapter 7 protection. In a Chapter 13, you can often discharge debts you took responsibility for paying in your marital settlement agreement, even if the language in your agreement includes hold harmless clauses. This is because one section of the U.S. Bankruptcy Code – 523(a)(15) – does not pertain to Chapter 13 filings. Section 523(a)(15) dictates that any debt associated with a divorce decree or settlement agreement is not dischargeable.
Some property settlement debts are never dischargeable. Neither Chapter 7 nor Chapter 13 bankruptcies discharge child support, alimony or anything else paid for the benefit of your ex-spouse or your children. This includes child support payments made to your state child support enforcement agency, health insurance coverage, education costs, or even life insurance if you've named your ex or your children as beneficiaries. It includes mortgage payments you may have agreed to make for your family's home. Additionally, the court won't discharge your Chapter 13 bankruptcy after completion of your repayment plan unless you're current with your support obligations. Under the BAPCPA, family support obligations are inviolate; you can't eliminate or reduce them by filing for bankruptcy.
Burden of Proof
When you file for Chapter 13 bankruptcy protection, your marital settlement agreement will most likely come under some scrutiny by the court if you're looking to discharge any associated debts. You may have to prove that the debts are clearly not support-related and were never intended to be for the benefit of your ex-spouse or children. It may help if the terms of your decree or settlement agreement are extremely clear and concise and they spell this out, but the court may investigate beyond this black-and-white language. For example, if you're obligated to pay off your son's orthodontia bill, the court will probably consider this debt support-related. However, if the debt stems from a boat you and your spouse purchased while married and you have possession of the boat, the court will probably allow the discharge. There's often a fine line between support-related debts and other property settlement debts, so you might benefit from consulting with an attorney before you file for bankruptcy.