Like child support, alimony is a domestic support obligation that cannot be discharged in bankruptcy. However, filing Chapter 7 or Chapter 13 bankruptcy might help an alimony obligor (payor) get other debt discharged and make the alimony payment more affordable. Our bankruptcy attorneys can help you with this.
How obligors are treated when they fall behind in paying alimony differs state-to-state. In many states, an alimony obligor who defaults on his or her alimony payment will be charged interest as the arrears pile up. A family court judge could order an obligor’s wages garnished, an obligor’s drivers license suspended, or even sentence an obligor to prison.
Domestic Support Obligations in Bankruptcy
In the Bankruptcy Code, a “domestic support obligation” is a financial obligation “in the nature of alimony, maintenance, or support” ordered to be paid by the court.
What does “in the nature of” mean? Congress used that language in recognition of the fact that when parties divorce, certain aspects of their property settlement agreement may be intended for support if not described that way expressly.
A bankruptcy judge will always look at the property settlement agreement carefully to determine whether any of the arrangements are really “in the nature of support” rather than simply division of assets. Generally, if an obligation is necessary to help the obligee (recipient) pay for basic necessities, it will qualify as support. The bankruptcy judge also looks to whether:
- The obligation is labelled as “support” in the divorce judgment;
- The obligation was placed in a section of the judgment labelled “support”;
- The obligation terminates when the obligee dies or remarries;
- The obligation terminates when the obligor remarries;
- The obligation is payable over time;
- There is a significant disparity in the parties’ relative incomes;
- The obligation looks like it makes up that disparity; and
- There is no other mention of support elsewhere in the divorce judgment.
Any division of marital property that cannot be categorized as “in the nature of support” using this criteria may be dischargeable in bankruptcy.
There are two other criteria for finding that a debt is a non-dischargeable domestic support obligation:
- The debt must be owed to a former spouse, and
- The debt must be incurred in connection with a court order, such as a divorce judgment or property settlement agreement.
Property settlement agreements can be used to set forth distribution of marital assets as well as responsibility for marital debts. While most property settlements are not dischargeable in Chapter 7, these can be discharged in Chapter 13:
- Hold Harmless Agreements
- Cash in Lieu of Other Assets
Hold Harmless Agreements and Chapter 13 Bankruptcy
If credit card debt was incurred by one or both spouses to benefit their family, either spouse might take responsibility for it in their property settlement agreement. While that agreement is enforceable against both spouses, it is not enforceable against the credit card company — the credit card company can try to collect from either spouse, regardless of their agreement.
Spouses in this situation often execute a Hold Harmless Agreement, which provides that if the spouse taking responsibility for the debt does not pay it, and the credit card company collects from the other spouse, the spouse who was supposed to pay must reimburse the spouse who paid.
This reimbursement debt is not dischargeable in Chapter 7 but may be dischargeable in Chapter 13. If you owe this type of debt, talk to an experienced bankruptcy attorney about whether you can have it discharged.
Cash in Lieu of Other Assets and Chapter 13 Bankruptcy
It is common for couples to offer cash in lieu of other assets, especially when the marital home is their only major asset. In that case, if the custodial parent wants to stay in the home with the children, he or she might agree to pay their ex so much per month until they pay off half of the value of the home.
This kind of debt is not dischargeable in Chapter 7 bankruptcy, but may be dischargeable in Chapter 13 bankruptcy. If you have this type of debt, contact a local Philadelphia bankruptcy attorney to discuss your case.
Chapter 13 Bankruptcy and Alimony Arrears
Alimony arrears is a “priority debt” that must be paid before any general unsecured debt is paid. An obligor can stretch out payment of alimony arrears over his or her 3 to 5 year Chapter 13 plan.
Debt arising under Hold Harmless Agreements and Cash in Lieu of Other Assets provisions in a property settlement agreement are treated as general unsecured debt and are dischargeable. Whether those debts are paid or partially paid is determined by the amount of income the debtor/obligor has to fund his or her Chapter 13 plan. If he or she has only enough income to pay alimony arrears over five years, then the rest of the general unsecured debt is not paid at all and is discharged.
Bankruptcy Can Help Struggling Child Support or Alimony Obligors
While bankruptcy cannot help an obligor by discharging alimony arrears or changing the amount of alimony paid, both Chapter 7 and Chapter 13 bankruptcy can help an obligor by eliminating other debt. Chapter 13 can be used by obligors to eliminate certain financial obligations under a property settlement agreement or to establish a reasonable payment plan of alimony arrears over between three to five years.
Talk with an experienced Philadelphia bankruptcy attorney about whether there are any aspects of your property settlement agreement that are not “in the nature of” support and therefore eligible for discharge in bankruptcy. Even if you must pay support and repay support arrears, elimination of your other debt might improve your financial situation drastically. If you need a local bankruptcy attorney, call The Law Offices of David M. Offen today. Your initial consultation is free of charge!