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Divorce and Bankruptcy – It’s complicated

Posted on Feb 20, 2014 in Uncategorized

Divorce is complicated. Bankruptcy is complicated.  Divorce and bankruptcy together are really complicated.

The Bankruptcy Code is a series of trade-offs. The interests of creditors are balanced with those of the Debtors who need relief.  Some debts can’t be wiped out in bankruptcy.  Rights arising from divorce are treated with great respect in bankruptcy. Here are some debts which can’t be3 discharged in bankruptcy.

  • recent tax debt
  • debts where the debtor lied or committed fraud
  • student loans
  • debts arising from divorce – domestic support obligations in particular
  • debts arising from intentional wrongful acts – like assault and battery
  • debts arising from justifiable reliance on a false financial statement
  • debts arising from embezzlement or defalcation.

The Bankruptcy Code is sometimes much more complicated in practice than it is as written. An example of this is found at sections 523(a)(5) and (a)(15) both of which deal with debts arising from dissolution of marriage or divorce..

Bankruptcy Code section 523(a)(5) is straightforward: Not dischargeable is any debt for a “domestic support obligation.” So child support, alimony, and so forth are not dischargeable in bankruptcy. 523(a)(15) specifies that not dischargeable is any debt “to a spouse, former spouse, or child of the debtor” that isn’t child support, but that is made “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…”

When representing a debtor in bankruptcy, an attorney needs to review the divorce decree. But the analysis doesn’t stop there.

Because 523(a)(15) has been interpreted more broadly than it reads. What if, for example, a divorce decree specifies that one spouse will be 100% responsible for a joint credit card?

That wouldn’t be a debt to the (ex-)spouse. It’s a debt to the credit card issuer. It seems like it shouldn’t be 523(a)(15) debt – but it is.

Imagine: A family court Judge has already found one partner responsible for payment of the debt. If that partner doesn’t pay – if that partner is discharged in bankruptcy – the debt doesn’t just evaporate. The other partner retains the obligation to pay. For that reason, even though this hypothetical obligation to pay is not a debt “for a domestic support obligation,” and it’s not “to” the spouse, former spouse, or child, it’s still a 523(a)(15) debt. But it’s not, interestingly enough, 523(a)(5) debt.

Not that it makes sense; It’s complicated. There are options. A chapter 13 discharge may, in fact, discharge 523(a)(15) debt, just like it can discharge parking tickets (523(a)(7)) that a chapter 7 can’t discharge. A lawyer needs to be both sophisticated and ready for a swashbuckling argument with the other partner’s attorney. Settlement is possible. The point is, in this and so many other ways, the Code has nuances and a client filing for bankruptcy needs a lawyer who can explain them, and can make them work best for the client’s needs.

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