By Kitty J. Lin
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.