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Divorce and Bankruptcy: Surprising Results

Divorce and Bankruptcy: Surprising Results
"""Separation In bankruptcy, agreements that are incorporated into a divorce decree (and divorce decrees themselves) can have problematic and sometimes unexpected consequences. With a separation agreement or divorce decree, a number of bankruptcy's general principles can be drastically altered. This article discusses some of the difficulties that divorces and divorce decrees pose for subsequent bankruptcy filings.

Domestic support obligations, such as child support and alimony, are excluded from discharge under section 523(a)(5) of the bankruptcy code, as is common knowledge. This means that the debtor will remain liable for the debt even after other debts have been discharged. Also excluded from discharge under section 523(a)(15) are debts owed to a spouse. This appears to be a straightforward and limited exception at first glance (unless the debt is owed to the spouse, it is discharged). This, however, has a much greater impact than initially appears.

Courts have interpreted section 533(a)(15) to include pre-existing marital debts committed to be paid by one spouse (the debtor spouse) in a separation agreement or divorce decree. 2010 (10th Circuit BAP) In re Wodark, 425 B.R. 834. This is the case when the separation agreement is incorporated into a legally binding divorce judgment. A divorce decree is not just a contract; it is a judgment. Consequently, the non-debtor spouse may obtain an order of contempt if the debtor spouse fails to pay. In a chapter 7 bankruptcy, the debt to creditors is discharged, but the spouse has the right to enforce the judgment (divorce decree).

The limitation on the discharge of debts owed to the spouse under 523(a)(15), as discussed above, does not apply, however, in a chapter 13 bankruptcy. Upon completion of the chapter 13 plan, the debt owed to the spouse is discharged under Section 1328(a)(2), also known as the super discharge provision.

Therefore, if one of the primary debts to be discharged is divorce decree debt, the debtor should file a chapter 13 petition instead of a chapter 7 petition. Although the difference between chapter 7 and chapter 13 regarding former spouses may seem unexpected, it is consistent with one of the primary objections to the 2005 bankruptcy reform: to encourage more chapter 13 filings. Another recommendation is to apply for bankruptcy before the divorce is finalized.""

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"Divorce and Bankruptcy: Surprising Results" was written by Mary under the Finance / Wealth category. It has been read 168 times and generated 1 comments. The article was created on and updated on 01 June 2023.
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