Do you have current divorce obligations that you cannot pay? At one time these types of debts, so long as they were not child support, alimony or spousal support were easily discharged in a chapter 7 bankruptcy.
In 2001 I filed a bankruptcy for a divorced mother. She received a business in the divorce that once belonged to her father. When her dad retired he had to split the territory of the business between his daughter and her husband since the franchisor would no longer permit one person to possess a large geographical territory. In the divorce she received both shares of the business. The payment for the husband’s share was in the form of a management agreement. Husband was to receive monthly payments from the business for the revenue from his former share.
In the Divorce Court husband affirmed that the management agreement was a property settlement and not alimony or spousal support. I scheduled the management agreement as a debt. A discharge of debts issued. Husband’s attorney objected in the divorce court, not the bankruptcy court. Following a trial on the objection in the Lorain County Domestic Court I won an order that the discharge of the agreement stands since it was not support.
Would I be able to discharge such a divorce obligation today? Sadly the answer is now NO. The bankruptcy code contains two separate provisions excepting divorce orders from discharge in chapter 7:
- The first is support. Nothing new here. This has always been a part of the bankruptcy code so long as I have been practicing as a Cleveland bankruptcy attorney.
- The second is a new addition under the 2005 changes to the bankruptcy code. Now any obligation, not in the nature of support, contained in a dissolution agreement, or divorce decree which is for the benefit of a child, spouse or former spouse it cannot be discharged in chapter 7 bankruptcy.
Often these types of commitments take the form of joint debt YOU are ordered to pay by the divorce court. Other commitments are ones where you are ordered to pay and the obligation contains a “hold harmless” provision. This means that you have to make your ex whole for any loss they suffer from your failure to meet the payment.
The management agreement I discussed would not be discharged in a chapter 7 case if filed today. Notice I said chapter 7 case. The exceptions to discharge in a chapter 13 case still include Child support, and alimony or spousal support. Again, no surprise. However, the new provision regarding provisions for the benefit of children, spouses or former spouses is not in this part of the code. This is a big surprise.
What this means is that the right that Congress and the Bush administration took away is still available if you file a chapter 13, complete the plan, and obtain a discharge of the debt. This means that your child or your spouse may receive nothing, some portion, or the entire obligation depending on your chapter 13 plan.
By far the best choice is to file for bankruptcy with your spouse before or during the divorce. Once you are no longer married, a joint chapter 7 bankruptcy is no longer an option.
If this post has helped you why not share your experience and leave a comment?
photo credit: walknboston
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Great information! I’ve been looking for something like this for a while now. Thanks!