Bankruptcy and Divorce, What You Should Know

by Matthew Grech | Sep 10, 2014 | Article |

Like many areas of law, the interplay between federal bankruptcy law and state family law can be complex and confusing. As such, it is the objective of this Post to provide a brief summary of three issues that often arise when these areas of law intersect.

The first issue is whether debts assigned to a party pursuant to a Marital Settlement Agreement ("MSA") are dischargeable in Bankruptcy. The answer to this question turns on the type of debt and whether the individual debtor files for Chapter 7 or Chapter 13 Bankruptcy protection. For example, let's say that the MSA allocates all of the community credit card debt to Husband, and then Husband proceeds to file Chapter 7 and receives a general discharge of his debts. As a result, the credit card companies can no longer collect these debts from Husband. However, in the event that the credit card companies are successful in collecting these debts from Wife, she has the right to go after Husband to seek reimbursement for any monies paid to, or taken by, the credit card companies. Now, let's use our same example, but instead rather than filing a Chapter 7, Husband files a Chapter 13 Bankruptcy petition. Here, as long as Husband successfully completes his Chapter 13 Plan and thus receives a discharge, he is then relieved of the legal obligation to pay back the credit card companies and Wife.

The next popular issue is whether domestic support obligations, whether they are child or spousal support payments, are dischargeable in Bankruptcy. Here, the answer to this issue is relatively simple. No. Specifically, domestic support obligations are never dischargeable, regardless of whether a person files for Chapter 7 or Chapter 13 Bankruptcy protection.

Our final issue is not necessarily as contentious as the other two. In fact, it arises when a person is attempting to do the "right thing," as opposed to attempting to make an ex-spouse's life more difficult or simply not caring what impact the filing for Bankruptcy protection has on an ex-spouse. This issue arises when a person has fallen behind in his/her Domestic Support Obligations ("DSO") and wants to become current and thus abide by any family law court orders. Here, a person can file a Chapter 13 Bankruptcy petition. By doing so, the Chapter 13 debtor remains responsible for making the ongoing, post-petition DSO payments directly to the ex-spouse. Additionally, the debtor is able to get caught up with the delinquent, pre-petition DSO payments by making his/her monthly Chapter 13 Plan payments directly to the Chapter 13 Trustee. The Trustee then in turn will issue the payments to the receiving ex-spouse. Thus, in many cases the filing of a Chapter 13 Bankruptcy petition benefits both ex-spouses, in that the paying spouse gets the opportunity to become current with his/her DSO payments while receiving protection from the Bankruptcy Court from his/her other creditors, and the receiving spouse can rely on timely, regular payments via the Trustee.

To further explore what Bankruptcy can offer you, please call Grech Legal at 650-549-7728 for a free debt consultation.