Your Ex's Bankruptcy Can Cost You Dearly

Your Ex's Bankruptcy Can…

Divorce cases can be hard, time-consuming, and costly. No surprise there. But did you know that certain monetary awards can be discharged in bankruptcy, even after the ex-spouse spent many years and dollars fighting for them?

Generally, a dissolution of marriage will result in awards of alimony, child support, and equitable distribution of marital assets, or all of them. Amounts due from one spouse to another will be fixed in a final judgment that creates a legal obligation to pay.  A judgment, however, is just that. It is not money in the bank.

Sometimes, former spouses file for bankruptcy protection, whether due to actual financial problems or out of spite, in hopes of discharging their debts to ex-spouses. For the spouse that is owed money, two things become important: the chapter under which the ex-spouse filed for bankruptcy, and the nature of the debt.

Bankruptcies under chapter 7 of the bankruptcy code are known as liquidations. Under this chapter, the debtor turns over all but exempt assets (like a homestead property) to the bankruptcy estate for liquidation. Creditors are paid from the proceeds of the liquidation. Most chapter 7 cases are no-asset cases, so that many creditors don’t get paid at all.

However, not all debts can be discharged under chapter 7, including many kinds of tax debts, debts incurred by fraud, and debts arising out of car accidents in which the debtor operated a vehicle under the influence. Importantly for such debtors’ ex-spouses, debts arising out of marriage dissolutions also made the list. In other words, if the debtor ex-spouse filed under chapter 7, there should be no impact on alimony, child support, fee awards, or equitable distribution obligations.

Things get more complicated if the debtor ex-spouse files under chapter 13 of the bankruptcy code. Under chapter 13, debtors propose a plan to pay their creditors over a period of three to five years. Generally, secured debts (like mortgages, car loans, etc.) must be paid in full, while unsecured debts (like credit card balances) are often paid only cents on the dollar. At the end of the plan, most remaining debts are discharged.

Like in a chapter 7, not all debts can be discharged under chapter 13. This is where the nature of the debt becomes important. The bankruptcy code under chapter 13 still does not allow a discharge of “domestic support obligations.” For purposes of this blog post, the term “domestic support obligation” means debt owed to a former spouse in the nature of alimony, maintenance, or support.

However, other debts arising out of a divorce, including attorney fee awards or equitable distribution payments, can be discharged. Since those debts tend to be unsecured, the former spouse will be paid some fraction of the amount owed over the life of the plan, after which any remaining debt will be wiped out.

It is easy to see how an ex-spouse’s chapter 13 bankruptcy can render meaningless a victory that resulted in an award that is not a domestic support obligation.

If you are contemplating filing for divorce or are in the middle of one, or if your former spouse has already filed for bankruptcy, contact our team at Iurillo Law Group, so we can help you navigate your former spouse’s bankruptcy issues and protect your interests.

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