|Discharge of Divorce Debts in Bankruptcy: The Timing of a Bankruptcy Petition - Before or After the Dissolution?|
By Arthur W. Rummler
Questions abound as to bankruptcy as it relates to divorce. Most often, the questions involve whether a certain debt would be dischargeable by a client or the spouse. Lately, the questions surround the timing of filing a bankruptcy petition, and the all important question of whether attorney fees can be discharged in bankruptcy. It seems that, for better or for worse, divorce and bankruptcy will be intertwined for eternity. Media reports confirm that divorce is actually the second leading cause of excessive debt accumulation.1 As such, divorce often leads to bankruptcy.
The Bankruptcy Code2 has several specific provisions that relate to family law and divorce issues. As with all things related to bankruptcy since the watershed year of 2005, the past laws were significantly affected by the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"). These broad changes expanded the law in some very important ways. This article focuses on the dischargeability of various divorce related debts in bankruptcy, including attorney fees, as well as the timing of filing a petition in bankruptcy for divorcing (or divorced) couples.
Understanding the Bankruptcy Discharge
The primary goal for most bankruptcy cases is the discharge of debt. The process begins when a debtor files a bankruptcy petition and fully discloses all assets and liabilities. Additionally, the debtor provides disclosure of certain financial information such as transfers of property, history and sources of income, lawsuits involving the debtor, and all other pertinent information that assists creditors and the bankruptcy trustee in analyzing the case. In exchange for compliance, and absent any other issues, a debtor typically receives a discharge of debts.
However, certain debts are not dischargeable under the Bankruptcy Code. With respect to divorce related debt, there are two specific provisions that apply. Under 11 U.S.C. Section 523(a)(5) certain "support" debts (payments) are non-dischargeable. Broader in scope and more comprehensive, 11 U.S.C., Section 523(a)(15) applies to debts incurred through the course of a divorce case.
Discharge of "Support" Payments
Simplicity is not often synonymous with the Bankruptcy Code. However, 11 U.S.C. Section 523(a)(5) perhaps is an exception. The section provides in pertinent part, that:
"(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;" (emphasis added) 3
The Bankruptcy Code defines Domestic Support Obligation at 11 U.S.C. 101(14A). That section provides:"The term "domestic support obligation" means a debt that
accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is—
(A) owed to or recoverable by—
(i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or
(ii) a governmental unit;
(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;
(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of—
(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and
(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt." 4
That is a mouthful to say this: a bankruptcy debtor attempting to obtain a discharge of debt will be prohibited from discharging alimony or maintenance and child support payments.
What does a support recipient need to do to enforce this? Section 523(a)(5) applies to discharges under both Section 727 for Chapter 7 cases and Section 1328(b) for Chapter 13 cases. These types of debts are non-dischargeable automatically. A recipient of such payments who is a creditor in the bankruptcy case does not need to file suit within the bankruptcy case (known as an Adversary Proceeding) in order to preserve non-dischargeability.5 In short, the recipient needs to do nothing.