Chapter 13 bankruptcy can discharge non support obligations associated with a divorce that are non-dischargeable in Chapter 7.
That’s worth repeating: any marital settlement agreement or court judgment that calls for payment or indemnity by one spouse to the other in the future is potentially vulnerable to a subsequent bankruptcy filing by the obligor-spouse.
While obligations deemed to be “support” by a bankruptcy court cannot be discharged in any chapter of bankruptcy. Chapter 13 permits discharge of non support debts incurred in divorce to be discharged.
Currently, Chapter 13 is available only to individuals with debts below $2.75M; recent legislation lumps secured and unsecured debts together to get that total.
With awareness of the bankruptcy possibility in mind, careful deal-making during the divorce can minimize those vulnerabilities.
Debts incurred in divorce
Bankruptcy Code 523(a)(15) deems debts incurred in the course of a divorce to be non-dischargeable in chapters 7 and 11. But, the Chapter 13 discharge is broader: it discharges the debts described in §523(a)(15).
So, any obligation for future payment to equalize the division of property, or any obligation to hold a former spouse harmless from a debt of the marriage, is ripe for discharge in Chapter 13. And agreements barring the filing of bankruptcy are unenforceable.
The only lever a creditor-spouse has to prevent that discharge is a challenge the confirmation of a Chapter 13 plan for failure to comply with the law or for lack of good faith. That’s chancy and expensive.
Prevention is more reliable.
The bankruptcy-proof divorce
Strategies to insulate the division of assets and debts from upset by a Chapter 13 bankruptcy by one of the former spouses need not be complicated.
1. Eliminate all existing debts
Make it a goal to have no debts to others that survive the divorce. Get rid of joint debts by paying them from assets.
Paid off or not, cancel open accounts and authorized user status so there is no chance of additional charges post divorce.
2. Assign debts to spouse contractually liable for debt
You only have to worry about a bankruptcy if some of the debts for which your client is personally liable are assigned to the other spouse for payment. No agreement between the spouses can cut off a third party’s rights against a spouse.
So, avoid creating obligations of one spouse to pay the other’s debts in the future by dividing debts consistent with the legal liabilities of the spouses to each creditor. Assign Mary’s contractual debts to Mary, John’s debts to John, and pay off joint debts. That way, any bankruptcy discharge of the duty to indemnify an ex spouse for debts discharged in bankruptcy makes no difference.
3. Divide assets equally
Avoid an uneven division of assets where one spouse is paying money in the future to equalize the division. That equalizing payment is subject to discharge in Chapter 13.
Don’t leave the division of the marital home for later: if it remains community property, the entirety of the home becomes property of the bankruptcy estate, potentially available for sale for the benefit of creditors.
Conform registered titles to the agreed-upon division of assets.
4. Secure any future performance with a lien
As a rule, bankruptcy doesn’t alter liens securing debts: liens survive the bankruptcy. And Supreme Court decisions insulate liens created in the division of martial property from being avoided in bankruptcy. So, if you can’t achieve an even division, grant the spouse to whom the equalizing payment is owed a lien on the assets awarded to the other. Recognize that the lien is only as good as the value available to secure it.
5. Reserve support
After a bankruptcy discharge, the family court cannot attempt to make things “right” between the spouses by revisiting the division of assets and debts. But a family court can award support to the spouse whose right to an equalizing payment was discharged, or whose protection from other creditors was wiped out in the ex’s bankruptcy. Reserving an award of support until the non support financial obligations of the spouses to each other are satisfied gives the family court a tool to grant some relief to the non bankrupt spouse.
What isn’t at risk in bankruptcy
Bankruptcy by an ex-spouse is no threat to support. Whether it’s called family support, child support, alimony, spousal support, or maintenance, the obligation to pay support simply is not dischargeable in any form of bankruptcy.
Further, the automatic stay, created when someone files bankruptcy does not stop proceedings for custody, visitation, paternity, alternation of status, and collection of support from assets that aren’t “property of the estate“..
The intersection of bankruptcy and divorce can be volatile. Plan and draft with the bankruptcy possibility in mind.
More
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Closer look at breach of fiduciary duty claims in Chapter 13
