Bankruptcy and Divorce

cummingskelleylaw
December 20, 2012

(US law and generally) The effect of a bankruptcy filing in the United States on debts owed to an ex-spouse pursuant to a divorce depends upon what chapter of bankruptcy a person files. Generally speaking, individuals file bankruptcy under either Chapter 7 or Chapter 13 of the Bankruptcy Code. These two chapters treat divorce debt differently.

First a brief description of Chapter 7 and Chapter 13 is in order. A Chapter 7 Bankruptcy case is frequently referred to as straight bankruptcy or a liquidation. In a Chapter 7 a trustee is appointed. The trustee reviews all the assets of the debtor and determines if there is enough value in any of the assets to sell the asset, pay the cost of selling the asset, pay any debt secured by the asset, and have some money left over. If the amount left over is more than the amount a debtor is allowed to exempt under the law the trustee will liquidate the asset and divide the remaining funds among the creditors. In the vast majority of Chapter 7 cases there are no assets to liquidate. That is, there are no assets with value above the cost of sale, the payoff, and the amount the debtor is allowed to exempt.

In a Chapter 13 the debtor makes monthly payments to a Chapter 13 trustee, who splits the money up among the creditors of the debtor in accordance with a Chapter 13 Plan and the Bankruptcy Code. Generally people file Chapter 13 to try to keep an asset like a house or a car by paying for the asset (or catching up payments) over the term of the Chapter 13. The principal difference between a Chapter 7 and a Chapter 13 is the monthly payment required by a Chapter 13.

In Both Chapter 7 and Chapter 13 it is not possible to discharge debts that are for alimony, maintenance, or support. Section 523(a)(5) of the Bankruptcy Code makes those debts non-dischargeable. Furthermore, that same Code section gives the bankruptcy court the authority to determine if a debt is “in the nature of” alimony maintenance or support and hence treat it as if it were actually an alimony maintenance or support debt.

Property settlement debt is treated differently. In a Chapter 7 property settlement is non-dischargeable under Section 523(a)(15). That is, if you file a Chapter 7 it does not matter whether your debt to your spouse is characterized as support or as property settlement. Neither property settlement nor support debt will be discharged in the bankruptcy.

In a Chapter 13, however, property settlement is dischargeable. This provides someone the opportunity to file a Chapter 13, make payments over the course of a three to five-year time period, and discharge any remaining unpaid debt. Such a course of action might be attractive for someone who has a large property settlement obligation dating back to a better economic time that cannot be paid practically in his present circumstances.

Obviously, individual circumstances can make a very big difference in whether to file a bankruptcy and what chapter of bankruptcy to choose. Before you take action based on this article we urge you to seek local bankruptcy counsel to review your particular facts.

Charles Kelley is a lawyer practicing with the firm of Cummings & Kelley, PC in Gainesville, Georgia. Mr. Kelley has been assisting individuals and small businesses with issues surrounding debt for over 19 years.