Monthly Archives: September 2012

Are Debts in a Marital Settlement Agreement Dischargeable in Bankruptcy?

By Ryan C. Wood

In today’s rough economic climate there are more and more people who have a lot of debts and who are also getting divorced.  What happens to that debt in a divorce?  One common scenario is the debt will be addressed in a marital settlement agreement (“MSA”). The MSA may provide for a split of the joint debt with one party responsible for certain joint debt and the other party responsible for the other joint debts.  Keep in mind, the MSA is only an agreement between the two divorcing parties.  Creditors are not bound by the MSA.  They can go after any of the people that are liable for the joint debts.

As with a lot of situations one party may diligently comply with the MSA while the other may not have the funds to pay the debts they are responsible for and be forced to file for bankruptcy protection.  What then happens to the party that was diligently paying his or her debts as required by the MSA?  This depends on what chapter of bankruptcy relief the other party filed for and also whether the debt is considered to be for support.

If the party that defaulted on the joint debts hires a bankruptcy lawyer and files for Chapter 7 bankruptcy protection the joint debts listed in the MSA would be non-dischargeable in bankruptcy pursuant to 11 U.S.C §523(a)(5) or §523(a)(15).  This means that the defaulting party is still responsible for the debt that was considered his or her responsibility pursuant to the MSA even after the bankruptcy case is completed.  This normally does not help the party that was diligently paying his or her debt.  There are a number of problems for this person.  First, the defaulting party’s creditors could now come looking for the other party to pay the defaulted debt.  The diligent party could try to go back to family court to show that the defaulting party was not abiding by the terms of the MSA, however, the second problem is that the defaulting party does not have the funds to pay back the debt.  So the diligent party could potentially end up paying more fees to go back to court and have no resolution to his or her problems.  One way to solve this issue is for the diligent party to file for bankruptcy protection as well if he or she would otherwise qualify for bankruptcy.

If the party that defaulted on the joint debts hires a bankruptcy attorney and files for Chapter 13 bankruptcy protection, then it is very important to categorize the debt correctly.  If the debt is considered to be a support obligation that debt will be non-dischargeable and would need to be paid back 100% in the defaulting party’s Chapter 13 plan.  If the debt is not considered to be a support obligation, but incurred by the debtor the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court record, that debt is dischargeable in a Chapter 13 case as long as the Chapter 13 plan was completed successfully.

So what is considered to be a domestic support obligation?  11 U.S.C. 101(14)(A) provides a complete definition of what a domestic support obligation is.  In a nutshell, a domestic support obligation is a debt owed to your spouse, former spouse, child of the debtor, or the child’s parent for alimony, maintenance, or support established by a separation agreement, divorce decree or court order that is not assigned to a nongovernmental entity unless it was voluntarily assigned by the person receiving the obligation.

The bottom line is if both parties have incurred a lot of debt it may be advisable for them to file a joint bankruptcy petition prior to the divorce to take the debt out of the picture.  This would make the debt a non-issue so the parties can concentrate on other subjects that may be important in their divorce.  Of course, the ability to file a joint bankruptcy case would depend on the circumstances.  You should contact an experienced bankruptcy attorney to analyze your case.

What Happens if I Owe Taxes After I File My Bankruptcy Case?

By Ryan C. Wood

I run across this scenario far too often: finances are strained at home so you decrease your tax withholding on your paycheck.  This choice is really just a temporary Band-Aid though.  You have a little more money to spend on your expenses but you will end up owing the taxing authorities money when it comes time to file your taxes at the end of the year.  If you don’t pay your taxes that are due by April 15 (or whenever taxes are due for that year) you will end up having to pay penalties and interest on top of the taxes owed.  So what happens if you encounter this scenario after you have filed for bankruptcy?

Chapter 7 Bankruptcy

The taxes you owe after you file a Chapter 7 bankruptcy case is your own responsibility.  One thing to point out is that since your Chapter 7 bankruptcy case eliminated all of your eligible dischargeable unsecured debts you should now have some breathing room to change your withholding back to the correct amount.  If you are still struggling to pay your expenses after your Chapter 7 bankruptcy case is filed you need to take a close look at your budget.  That may mean cutting down on a lot of expenses you spend your money on.

Chapter 13 Bankruptcy

All taxes that you owe prior to the filing of your Chapter 13 bankruptcy case are included in your Chapter 13 plan.  All priority unsecured tax debt (generally taxes that are owed in the most recent three years, filed less than two years ago and assessed more than 240 days ago) will be paid 100% in your plan as a priority unsecured debt and all other tax debt will be treated the same as your general unsecured debt.  Please consult bankruptcy lawyers in your jurisdiction regarding your specific circumstances.

The question becomes what happens when you owe taxes after you file your bankruptcy case? First, you need to let your bankruptcy attorney know that you owe taxes.  The Chapter 13 plan is a payment plan for all debts you owe prior to filing for bankruptcy and you really should not be incurring new debt.  It would be impossible for the trustee to administer your Chapter 13 plan if you continue to incur additional debt while you are repaying your old debt.

Many of our clients that are currently in a Chapter 13 bankruptcy cases ask me how they can pay the additional taxes due when they are committing all their disposable income to pay into their Chapter 13 plan. Again, one thing you should do immediately after filing bankruptcy is to change your withholding back to the correct amount so you do not end up owing more taxes in the future.  There are generally two main options to pay the new taxes owed: 1) schedule a payment plan outside your bankruptcy case with the taxing authority and decrease your monthly expenses to afford the monthly payment, and 2) modify your bankruptcy plan to pay the new tax debt for the remainder of your plan.

Under 11 U.S.C. §1305 of the bankruptcy code a proof of claim may be filed for taxes owed to a governmental unit while the bankruptcy case is pending.  This is an exception to the rule indicating only pre-petition debts are allowed in the Chapter 13 bankruptcy plan.  Section 1305 claims have one slight difference to regular pre-petition tax debt: tax penalties are included in the claim amount and the tax debt is subject to interest in the Chapter 13 plan.

If you need to modify your chapter 13 plan to include additional tax debt you should consult with an experienced bankruptcy attorney in your jurisdiction.