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Marx was right! “Love flies out the door when money comes innuendo.”1
Unfortunately for some, money problems keep some couples together who’d rather be divorced. The issues become who pays the debt versus who keeps the couch, cat and castle.2
Bankruptcy can help divorcing couples get two fresh starts: one marital and one financial. Thanks to Congress the Bankruptcy Code Amendments of 2005 made this possible.
The “sea change” was: (a) changing domestic support obligations to first priority in payments to unsecured creditors; and (b) making or presuming, as non-dischargeable,3 all claims and property distributions arising from domestic support obligations (“DSO”).4
This means, to some degree, bankruptcy cases’ primary beneficiaries are the debtor spouse and the spouse with the DSO. The Debtor spouse gets their debts discharged. The spouse with the DSO gets their debt paid through the liquidation of non-exempt property. Where debts are joint, owned by both spouses, a joint bankruptcy case may be necessary.
The strategy generally puts the divorce before the bankruptcy case, chronologically. The divorce’s DSO order: (a) divides the spouses’ property among them; and (b) sets the support and child-support payments, if any.
The bankruptcy court is bound by the DSO to the extent its terms are supported by the spouses’ intent. Thus, the spouses can divide their marital property to take maximum advantage of federal and state law exemptions, prior to the bankruptcy. Where property is jointly owned with a right of survivorship, leaving the interests in place may be wiser for protecting it from creditors in the bankruptcy.
The bankruptcy will discharge the dischargeable debts. This leaves future income to pay support, child-support and avoid the serious repercussions of not paying these non-dischargeable debts. Non-dischargeable debts remain. However, the bankruptcy case will make resources more available to pay them. The bankruptcy case can help contest or discharge claims previously thought not dischargeable.5
With proper planning, the spouses get two fresh starts. Parties may disagree about selling jointly owned property. Retaining that property can freeze resources or commit revenues to a needlessly expensive endeavor. Consider the terms “house poor,” “under water,” and “house as anchor.” After considering factors of fairness and necessity, the bankruptcy court can permit selling the jointly owned property.6
The sale’s proceeds are distributed based on the spouse’s ownership interests. Life goes on. I’ve lectured about this around the country. So far no complaints in its use. As always, we’d love hearing your questions, comments and experiences.
1Groucho Marx, “Monkey Business” 1931
2Bankruptcy can’t help with who gets the kids. Although, it helps with supporting them.
3Bankruptcy Code § 523(a)(5) and (15).
4DSOs are defined by the Bankruptcy Code § 101
(14A) The term “domestic support obligation” means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is-
(A) owed to or recoverable by (i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or (ii) a governmental unit;
(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;
(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of
(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and
(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.
5For example, tax claims and student loans meeting certain criteria are dischargeable.
Bankruptcy Code § 523(a) (1)(A) and (a)(8)..
6Bankruptcy Code § 363(h).