Overview of the Dischargeability of Divorce Debts in Bankruptcy
By: Diane Brazen Gordon, Esq.
Law Office of Diane Brazen Gordon LLC
If a person contemplating bankruptcy has been divorced and owes marital obligations to a former spouse, careful consideration needs to be taken in order to determine which bankruptcy chapter to file. Bankruptcy cases can be filed under chapters 7, 11, 12, and 13 of the Bankruptcy Code. Most individuals file cases under chapters 7 or 13. The question of whether a marital debt is dischargeable in bankruptcy sometimes depends on what bankruptcy chapter the debtor files.
Section 523 of the bankruptcy code lists exceptions to discharge. When there is an issue of whether a marital debt is dischargeable, two of the exceptions may apply. These exceptions are Sections 523(a)(5) and 523(a)(15). The resolution of whether or not a marital debt is a DSO is crucial because DSO’s are not dischargeable under any bankruptcy chapter and DSO’s are entitled to first priority in the payment of unsecured claims. Therefore, when faced with the issue of whether a particular marital debt is dischargeable in a bankruptcy, the first question to ask is whether the debt is a DSO.
The definition of a Domestic Support Obligation (a “DSO”), is set forth in Section 101(14A) of the Bankruptcy Code.
A DSO must be
- owed to or recoverable by a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative;
- It must be:
- in the nature of alimony, maintenance, or support
- And it must be:
- established by a separation agreement, divorce decree, or property settlement agreement or court order.
In regard to the first element of the DSO definition, that the debt must be owed to or recoverable by a spouse, former spouse, or child of the debtor, the majority of courts find that the payment of support need not be paid directly to one of those payees but can be paid to a third-party.
In regard to the second element of the DSO definition, that the debt must be in the nature of alimony, maintenance, or support, the courts look to a variety of factors to make this determination. The bankruptcy court will look behind the label in the decree to determine the true intent of the parties and of the family law court at the time of the obligation.
Types of obligations which have been found to be nondischargeable DSO’s are: college expenses, medical expenses, health, life and disability insurance, retirement benefits, obligations to pay tax liabilities, obligations to make mortgage payments, obligations to pay the value of professional licenses or degrees, and guardian ad litem fees. Attorneys fees ordered to be paid for the nondebtor spouse’s attorney will likely be DSO’s. However, attorney’s fees owed by a debtor to his or her own bankruptcy attorney will usually be dischargeable.
If the debt is a DSO it is not dischargeable under any bankruptcy chapter and the question is answered. If, however, the debt is not a DSO, another exception to discharge may apply, which is section 523(a)(15).
In order to be excepted from discharge under section 523(a)(15), a debt must meet three statutory elements:
- the debt must be to a spouse, former spouse, or child of the debtor
- the debt must not be a DSO
- and the debt must have been incurred in the course of a divorce or separation or in connection with a separation agreement, divorce decree, or other order of a court.
On its face section 523(a)(15) sounds like it would except from discharge all property settlement debts that are not DSO’s. This is not necessarily so, and here is why.
Section 523(a)(15) does not apply in chapter 13 cases. The reason for this result is that the chapter 13 discharge provision in 11 U.S.C. section 1328(a)(2) does not include section 523(a)(15) in the exceptions to the chapter 13 discharge. This means that property settlement debts are still dischargeable in chapter 13. Because property settlement debts are still dischargeable in chapter 13 cases, it is important to know what chapter of bankruptcy the debtor filed.
If the applicable bankruptcy case is a chapter 7, a property settlement debt may be excepted from discharge under section 523(a)(15), as a debt to a spouse or former spouse incurred in the course of a divorce.
The presence of a hold harmless obligation in the marital settlement agreement will create a new debt between the spouses incurred in the course of the divorce, and the debt will be excepted from discharge under section 523(a)(15). A hold harmless clause states something like: “the party responsible for the debt will indemnify the other party and hold him or her harmless for the debt.” Courts are divided on the issue of whether a hold harmless provision is required in order to make a debt to a third-party fall within the language of section 523(a)(15).
Since the Bankruptcy Code was amended in 2005, a spouse who owes to an ex-spouse a debt incurred in the course of a divorce has much less ability to discharge that debt in bankruptcy, especially under chapter 7.
The information contained herein is for educational and informational purposes and is not legal advice.