November 21, 2017

Divorce Debts & Bankruptcy: What is Covered & What is Not

Certain divorce debts are non-dischargeable in bankruptcy, meaning they do not go away. Other divorce debts may be dischargeable in bankruptcy. This posts details how bankruptcy and debts related to divorce interact.

CHAPTER 7 BANKRUPTCY & DIVORCE DEBTS

A chapter 7 bankruptcy, or a “liquidation” bankruptcy, has little effect on divorce debts. Virtually all obligations owed to the ex-spouse are not covered by a chapter 7 bankruptcy, particularly any spousal or child support. Now, if a consumer incurred legal fees for that consumer’s legal representation (i.e., you owe your divorce attorney $5,000 for representation in a divorce), these fees are dischargeable in a chapter 7 bankruptcy. But little else relating to divorce debts, particularly spousal support or child support, are dischargeable in a chapter 7 bankruptcy.

Where it gets a bit tricky is any debt-assignment pursuant to a divorce decree and chapter 7 bankruptcy. For example, let’s say you have a Chase credit card that was jointly held with your ex-spouse for $10,000. In the divorce decree, you agreed to pay this debt solely. Now, 1 year later you file a chapter 7 bankruptcy. Chase will recognize the bankruptcy, and will not attempt to collect the debt from you. However, your former spouse is on the card as well, so Chase will go after the former spouse. BUT, in the divorce decree you said you would take care of this debt – what now? If the ex-spouse ends up paying for the Chase credit card, despite the fact that in the divorce decree you indicated you would pay it, the ex-spouse can come after you for recoupment, or the amount he had to pay on the card. Sometimes, however, when one former spouse files a bankruptcy, the other former spouse will file bankruptcy shortly after, making the above situation moot.

CHAPTER 13 BANKRUPTCY & DIVORCE DEBTS

How does this same situation play out in a Chapter 13 bankruptcy? If there is a debt-assignment, whereby one spouse takes on responsibility to pay a joint debt, a chapter 13 bankruptcy will take care of this debt, despite the divorce decree and debt-assignment. Debt-assignments, such as the above example, are dischargeable in a chapter 13 bankruptcy only. Furthermore, equalization judgments, or property settlements contained in divorce decrees, are dischargeable in a chapter 13 bankruptcy.

BANKRUPTCY & “IN THE NATURE OF SUPPORT”

In order to discharge a property settlement or debt-assignment in a chapter 13 bankruptcy, it must not be “in the nature of support.” If it is in the nature of support, it will be a non-dischargeable debt. For example, what if you agree to pay the Chase bill, and as a result, your spousal support is dropped by $300 per month. This may be a form of support, and non-dischargeable in a chapter 13 bankruptcy. Many of these cases are fact specific as to whether or not the debt-assignment was “in the nature of support.”

The intersection of bankruptcy and divorce debts can be a complicated area, with multiple factors at play. As part of my document production list I provide consumers at my free in-office bankruptcy consultation, I request a copy of the divorce decree. Due to issues relating to the divorce decree, clients may opt to file a chapter 13 bankruptcy to avoid property settlements and debt-assignments.

If you are interested in learning about bankruptcy and how it may interact with divorce debts, please call today for your free in-office bankruptcy consultation in Eugene.

Pursuant to 11 U.S. Code § 528: "I am a debt relief agency. I help people file for bankruptcy relief under the Bankruptcy Code."

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