If you or your spouse may file bankruptcy after you divorce, it is important to know how bankruptcy affects some common issues in divorces.
Prior to 2005, a debtor who was able to show an inability to pay for property settlement debts was able to have those debts discharged in a bankruptcy. This is no longer the case, and thus every type of obligation to a spouse, former spouse, or child of the debtor is non-dischargeable. See 11 U.S.C. §523(a)(5). See also 11 U.S.C. §523(a)(15).
This means that child support obligations, spousal maintenance (alimony), and property settlements are generally non-dischargeable in bankruptcy.
From a practical standpoint, though, as I discussed in my previous post, one spouse may still be “on the hook” for a debt that the other spouse is obligated to pay under the property settlement of the divorce decree. If the debt is in both spouses’ names, but the husband is obligated to pay for it under the divorce decree, if the husband doesn’t pay it, the wife will still have to answer to the creditors. Thus, if the husband is not paying the debt that he is obligated to pay under the divorce decree, and it is negatively affecting the wife’s credit, the wife may either need to pay that debt herself or file bankruptcy in order to begin to rebuild her credit. The wife may also have a cause of action for contempt against her husband.
Marital liens in real estate become property of the bankruptcy estate, because the bankruptcy code provides that “all legal or equitable interests of the debtor in property as of the commencement of the case” are property of the bankruptcy estate. See 11 U.S.C. §541(a)(1). This means that the trustee in a Chapter 7 bankruptcy case will often try to sell the marital lien interest. These liens may be sold at a discount. Thus, the debtor may be able to buy it back from the trustee.
In a Chapter 13 bankruptcy, a debtor must pay all amounts that he or she is required to pay under a domestic support obligation. Such obligations become due and payable after the petition is filed, and failure to make those payments is grounds for dismissal or conversion of the case. See 11 U.S.C. §1307(c)(11).
In order for a Chapter 13 plan to be confirmed, a debtor’s plan must provide for full payment of domestic support payments. This is because domestic support payments are a priority claim. See 11 U.S.C. §507(a)(1)(B). A Chapter 13 plan that does not provide for full payment of this priority claim is only allowed “if the plan provides that all of the debtor’s projected disposable income for a 5-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.” See 11 U.S.C. §1322(a)(4).
In conclusion, bankruptcy generally does not have a huge impact on divorce-related debts, because of the protections provided by the bankruptcy code for spouses, former spouses, and children of the debtor.