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Family Law and Chapter 7 Bankruptcy discharge of Marital Debt

Family Law Bankruptcy Discharge and Marital Debt Believe it or not, there is good news regarding one area of the rules governing bankruptcy for the family law practitioner The fact is in Chapter 7 cases the federal government has actually simplified the rules regarding a discharge in bankruptcy of any obligation that arises in the divorce context. Imagine a scenario which involves the entry of a final judgment of dissolution of marriage, whether after a contested trial or based upon the incorporation and ratification of a marital settlement agreement, that requires a husband to make payment of $10,000.00 and turn over certain firearms to the wife within 12 months to balance the equitable distribution award and make monthly payments of permanent alimony to the wife. Subsequent to the entry of the final judgment and prior to the deadline to make the payment of $10,000.00 and turn over the guns, the husband files a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code. The husband identifies all of the aforementioned obligations on the appropriate schedule of his bankruptcy petition. Subsequently, the former husband is granted a discharge under 11 USC Sec. 727 of the United States Code (the Bankruptcy Code). After the bankruptcy discharge and the 12 month deadline have passed, the wife moves the trial court for the entry of a judgment against the husband for the $10,000.00 owed plus interest, for the value of the firearms, and to hold him in contempt, because he has ceased to pay alimony. In his defense, the husband files a copy of the order discharging him from bankruptcy. Certainly in this scenario, allowing the husband to avoid payment to the wife of the $10,000 would be unfair. Presuming that the trial court made a fair division of the property and debts when it entered the Final Judgment, allowing the husband to avoid payment of the $10,000 would mean he walks away with $10,000 more in assets than the wife. Unfortunately, under the Bankruptcy Code as it stood prior to 2005 that is likely exactly what would have been allowed to occur. The question this article will explore is: Is an obligation a party incurred as part of a final judgment of dissolution of marriage for the equitable distribution of property and debts or payment of alimony dischargeable in Chapter 7 bankruptcy? The short answer: It no longer matters whether the obligation is in the nature of support or equitable distribution, it cannot be discharged in chapter 7. Under the previous rules, an obligation incurred in a divorce could be discharged unless it was for domestic support. The previous rules were modified, presumably at the behest of creditors, because of spouses manipulating the situation. One spouse, lets say the husband, would agree to take certain marital debt while all along planning to discharge it in bankruptcy and leave the creditor with its only option to pursue the wife for payment of the debt. Unfortunately, the wife usually had taken an equivalent amount of debt and was unable to satisfy the debt the husband had been able to discharge. What follows is the more detailed explanation of which rules currently govern this issue and how. Pursuant to Section 523 of the United States Bankruptcy Code (as amended by Public Law 109-8 in April 2005), certain exceptions to discharge for debts between spouses as part of a dissolution of marriage proceeding were added. Specifically, Section 523 now provides in pertinent part that: "(a) discharge under Section 727...of this title does not discharge an individual debtor from any debt... (5) for a domestic support obligation; or (15) to a spouse, former spouse, or child or the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with state or territorial law by a governmental unit." The bankruptcy courts in interpreting the 2005 amendments to Section 523 have since determined that, "the plain language of the statute provides that all debts, which do not qualify as domestic support, are also (emphasis added) nondischargeable." IN RE: Douglas, 369 B.R. 462 (2007). Further, "…the combination of Section 523(a)(5) and 523(a)(15) excludes from discharge all (emphasis added) marital and domestic obligations, whether support in nature, property division, or hold-harmless requirements,…." Hon. William Houston Brown, Bankruptcy and Domestic Relations Manual, § 1:3 (2006). Now back to the original scenario with the $10,000 payment owed along with transfer of the guns and payment of permanent alimony. As you can see, assuming the bankruptcy petition was filed subsequent to April 2005, a husband's obligation to pay the $10,000.00 would not be dischargeable in bankruptcy and neither is his requirement to turn over the firearms. This is despite the fact that it is clearly an obligation created as part of the property distribution instead of domestic support. This is true whether it is pursuant to a "separation agreement" or "divorce decree" so long as the obligation is incurred by the debtor (the husband here) “in the course of the divorce" or "in connection" with a separation agreement. This would also apply to make any “hold harmless" provision related to a joint marital debt non-dischargeable. Finally, even under the previous version of the Bankruptcy Code, as well the current version, the alimony payments would be nondischargeable in Chapter 7 bankruptcy because they constitute “domestic support". As a result, the obligations of the husband in this scenario survived the general discharge order under Chapter 7 of the Bankruptcy Code by operation of law. The discharge in bankruptcy does not bar the wife from pursuing a judgment or other collection and enforcement remedies against the husband related to these obligations.

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