Divorce and Bankruptcy

Financial stress can take a toll on relationships. Those in the Bay area may remember a time when, typically, the husband worked a 9-5 job while the wife stayed at home and took care of the children and the house. They would go on family outings on weekends year round. Women who worked often provided extra income for items like vacations and home improvement.

Those days are long over. Today, both partners must often work to maintain a middle class lifestyle while foregoing many of those extra luxuries llike vacations or home improvements. Prices of basics like food have skyrocketed while salaries have not risen at the same pace.

If those couples experience marital strife, the pressure of a difficult relationship combined with stressful working conditions can wreak havoc on personal lives. This can lead to increased spending on therapies and outings to keep the family together or it can lead to binge spending because people may think that “getting out and doing something big” is the magic that can save the relationship. In the end, this can lead to high credit card bills and even more stress, often to the point at which the parties split and break up the family.

Bankruptcy and Domestic Relations

When the parties split and find themselves in debt, they may turn to the United States Bankruptcy Code, or the Code, for assistance in managing their debt and making a fresh start. A main feature of the Code is the Automatic Stay, wherein creditors are stayed, or stopped, from collecting their debt from the debtor. Instead, the relevant credit holders will go through the bankruptcy process and get periodic payments from the trustee. The payments will usually be significantly less than what is owed.

While this feature is important and can help struggling parents while they are divorcing, not all payments are protected by the Automatic Stay. Per the Code, marital support is not excepted by the Code and cannot be discharged in bankruptcy. As such, court-ordered alimony payments and the like are not protected by the automatic stay and cannot be discharged in bankruptcy. Therefore, a struggling spouse protected by bankruptcy will nonetheless be required to send monthly alimony payments to his or her ex.

There are more details to this rule. Some of those details are noted below.

Also note that alimony payments and the like can be from the man to the woman and from the woman to the man. It is also applicable to same-sex divorces. While alimony is generally thought of as a male obligation and studies show that men pay significantly higher percentages of alimony, a woman can pay alimony to a man, depending on the lifestyle and arrangement during the marriage.

Nondischargeable Debt

Domestic support obligations are nondischargeable in both Chapter 7 and 13 cases. Property settlement obligations, as opposed to alimony or support, are dischargeable in chapter 13, but not in chapter 7. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, or BAPCPA, created such a ddiscrepancy regardless of ability to pay or whether discharge would benefit the debtor more than excepting the debt from discharge would beneft the nondebtor spouse. Another change is that state courts now have concurrent jurisdiction with bankruptcy courts to determine the dischargeability of a property-settlement obligation.

For a Chapter 13 case, provided that the debtor makes all payments under Chapter 13, then the debtor receives a discharge from all property settlement payments owed to the non-debtor spouse. If, however, the debtor is granted a “hardship discharge” then the property settlement payments will not be discharged and therefore owed to the non-debtor spouse.

A hardship discharge occurs when a Chapter 13 debtor is unable to complete the payment plan so the debtor motions for a hardship discharge. Under the Code, a Bankruptcy Court can grant a Chapter 13 debtor who cannot complete the plan a hardship discharge provided that the debtor meet certain criteria.

Under BAPCPA, Bankruptcy Courts, which are federally-mandated courts, can have concurrent jurisdiction with a Family Court, which is a state-mandated court, in administrating the bankruptcy. As such, a non-debtor spouse may seek relief from a stay in California Family Court instead of Bankruptcy Court.

Moreover, a Bankruptcy Court will rely on a Family Court’s characterization of a payment obligation. As such, a Family Court should contemplate from the outset that one party may file for bankruptcy. In turn, a Family Court would assert with clarity as to the nature of the support, whether it is marital support or a random obligation from one spouse to another.

Divorce can be difficult, especially financially. If you are divorcing and find yourself in a financial bind, bankruptcy may be right for you. Contact the debt relief firm of Melanie Tavare.