Can You File Bankruptcy on a Divorce Settlement?

Marital Settlement Agreement

A marital settlement agreement sets out the rights and responsibilities of each party following the completion of the divorce. The marital settlement may require one or more of the following:

1. Divide the credit card and other debt responsibilities;
2. Direct one spouse to pay monthly alimony and/or child support;
3. Award a vehicle to one spouse;
4. Divide retirement accounts between the spouses;
5. Award one spouse the family home and enter a monetary judgment to the other spouse for their percentage of the home equity.

Following divorce and entry of final orders that reflect the marital settlement, it is not uncommon for a bankruptcy to follow. If your former spouse files for bankruptcy, how will that affect the marital agreement? The initial question to answer is what types of obligations are covered in the marital agreement? Some obligations cannot be discharged in bankruptcy while others may be able to be discharged.

Domestic Support Obligations

A domestic support obligation is alimony (also known as maintenance or spousal support), child support or other award “in lieu” of alimony or child support. Domestic support obligations cannot be discharged in bankruptcy. The bankruptcy code defines a domestic support obligation (DSO) as a debt that is:

Owed to a spouse, former spouse or child like alimony, maintenance, or support (regardless of what it is called in the order/agreement), included in a marital, property or separation agreement, court order or order from another governmental unit, and not assigned to any entity except to collect the debt.

These debts – generally alimony and child support – cannot be discharged in bankruptcy.

Property Division Provisions May Be Dischargeable

What is a property division provision? During divorce proceedings, the parties divide their assets and debts. If assets are not easily divisible, such as the family home, a property division agreement may award the home to one spouse with the provision that the other spouse will receive a portion of the home’s equity at some later point. The intent is that one party may continue to reside in the home, but will have to pay the other party from a future refinance or sale of the home.

Another example is when the couple own a business. The property division agreement would award the business to one spouse and enter an order directing that spouse to pay the other spouse an amount equal to a percentage of the value of the business. The payment to the party not keeping the business may be immediate or at some later date.

These types of property divisions are not considered domestic support obligations. As such, the debt may be dischargeable in bankruptcy. Please note: if you discharge a debt through bankruptcy that is owed to your ex-spouse, they may file in the family law action to address it.

Which Bankruptcy May Discharge a Property Settlement?

Chapter 7

You cannot discharge any divorce-related obligation in a Chapter 7 bankruptcy. In addition to domestic support obligations, the bankruptcy rules also state that any debt incurred during a divorce or separation is not dischargeable in Chapter 7 bankruptcy.

Chapter 13

You may discharge non-DSO debts in a Chapter 13 bankruptcy. Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy does not prevent you from discharging debts that were ordered/agreed to be paid in a divorce proceeding, such as the division of home equity, division of equity in a business, or paying joint credit card debts.

Summary