Are Debts Ordered in a Separation Agreement Dischargeable in Bankruptcy?
When the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) became effective October 17, 2005, debts ordered in a separation agreement, divorce decree or other order of the Court became non-dischargeable. This can be reviewed in detail at 11 U.S.C § 523(a)(5) and 523(a)(15). Domestic support obligations, inclusive of alimony, child support and other debts ordered to be paid by the court, cannot be eliminated in bankruptcy regardless of whether it is ordered before, during or after the date of the bankruptcy filing. In addition, the debts cannot be eliminated regardless who is owed the debt – spouse, ex-spouse, child, guardian of the child or a governmental unit. 1 U.S.C § 101(14A).
If you are in the process of a separation and divorce, it is important to understand what you are obligating yourself to pay prior to signing the paperwork. A couple of common examples are provided below:
Example One: You and your soon to be ex-spouse have a credit card with a balance of $10,000. You and your spouse incurred this debt when trying to start a business. During the negotiations of the separation agreement, you decide to take responsibility for the credit card. You feel this is the right thing to do since you pushed the development of the business. In this case, your spouse is “held harmless” for this credit card balance. As a result, you must pay this debt.
Example Two: You and your ex-spouse own a home. Your ex-spouse and two children live in the home and want to continue to live in the property. Both of your names are on the first mortgage loan but only your name is on the second mortgage. You have agreed in the divorce decree to pay the mortgages on the home until your youngest child graduates from high school. Once again, since you took responsibility for the debts under the divorce decree, you cannot file bankruptcy to eliminate the debts on the two loans. You are now solely responsible for the debt on the house.
There are obviously many examples, but these are two of the more common scenarios we see at Duncan Law. Again, it is extremely important to assess your ability to pay prior to accepting responsibility for the debt¸ since it will not be dischargeable in bankruptcy.
Is Child Support or Alimony Included As Income in Bankruptcy?
Before you file bankruptcy your attorney will ask you for verification of your last six months of income as a factor to determine Means Test qualification. The Means Test is a household income limit you must fall below according to the number of household occupants in order to qualify for a Chapter 7 bankruptcy.
Child support and alimony are considered income and can greatly impact your ability to qualify for the Means Test. Income from child support or alimony may put you over the Means Test limit causing you to file a Chapter 13 bankruptcy instead of a Chapter 7 bankruptcy.
In addition to having an impact on your Means Test calculation child support and/or alimony will also be considered when determining your monthly budget moving forward. It’s important that you discuss any form of domestic support obligation (child support or alimony) you receive with your attorney before filing your bankruptcy.
Can I File Bankruptcy if I'm Behind on Child Support or Alimony?
Yes! You can still file for bankruptcy even if you are behind on alimony or child support. However, be aware that child support and alimony payments are non-dischargeable in a bankruptcy. In other words, these debts cannot be wiped out in bankruptcy.
If you are paying child support or alimony, you may get behind on these payments and the state court may threaten you with jail time for being behind. A Chapter 13 bankruptcy will usually allow you get “caught up” on these payments, avoid jail time, and pay the arrearages on the child support or alimony back through the Chapter 13 plan payments over three to five years making monthly payments to the Chapter 13 Trustee. The Chapter 13 Trustee forwards these payments to the person entitled to the child support or alimony. The bankruptcy does not stop present or current child support or alimony payments, but it can help you get caught up on these late payments and avoid possible jail time.
Does Bankruptcy Wipe Out Child Support or Alimony?
Unfortunately, alimony and child support cannot be wiped out in bankruptcy. Alimony and child support are considered “priority” debts that must be repaid. In other words, the bankruptcy laws view alimony and child support as very important debt that one cannot just wipe out with a bankruptcy.
However, if you are behind on your alimony or child support payments, bankruptcy can be helpful for you. If you are behind and have been threatened to go to jail, you could file a Chapter 13 Bankruptcy, which is a repayment plan. In a Chapter 13 bankruptcy, you repay a portion of your debts over a period of three to five years. At the end of your bankruptcy, you will no longer owe any unsecured debt (credit cards, medical bills) and will be caught up on any debts that you were behind on, such as child support.
A Chapter 13 bankruptcy is helpful for a person who is behind on alimony or child support payments because it helps you get caught up on your payments and will avoid any potential jail time. Other than completing a Chapter 13 bankruptcy you cannot wipe out alimony or child support in bankruptcy.
