A marital settlement, binding outside of bankruptcy, means little in Chapter 13.
No matter how prejudicial or unfair, a Chapter 13 discharge will relieve a former spouse of obligations of all obligations to their ex except for support.
It’s too late to protect your hard won rights to non support payments once the bankruptcy is filed.
Let’s look at how ex spouses are vulnerable to a bankruptcy discharge. Then we’ll explore ways to eliminate or reduce your exposure to a later bankruptcy filing by your ex.
Only in 13
Chapter 13 is a reorganization plan for individuals with regular income and debts less than the statutory ceilings.
It’s the only kind of bankruptcy case that allows a debtor to discharge non support obligations to a former spouse.
All debts owed to a spouse or child are non dischargeable in Chapter 7.
So, any obligation to pay to equalize the division of property or any obligation to hold a former spouse harmless from a debt of the marriage is ripe for discharge in Chapter 13.
The only lever a creditor-spouse has is to challenge the confirmation of a Chapter 13 plan for failure to comply with the law or for lack of good faith. That’s chancy and expensive.
Prevention is more reliable.
Make your divorce bankruptcy-proof
Here are five strategies to insulate the division of assets and debts from upset by a Chapter 13 bankruptcy by one of the former spouses.
1. Eliminate all existing debts
Make it a goal to have no debts to others that survive the divorce. You only have to worry about a bankruptcy if some of your debts are assigned to your ex for payment. Get rid of joint debts by paying them from assets. Or consider filing bankruptcy together, so that most debts are discharged as to both of you.
2. Assign debts to spouse contractually liable for debt
A marital settlement agreement or judgment of divorce only controls or creates debts that one spouse owes the other. A family court can’t change the rights of a third party creditor who isn’t a party to the divorce. So, avoid creating obligations of one spouse to pay the other’s debts in the future by dividing debts consistent with the legal liabilities of the spouses to the creditor. Assign Mary’s contractual debts to Mary, John’s debts to John, and pay off joint debts. That way, any bankruptcy discharge of the duty to indemnify an ex spouse for debts discharged in bankruptcy makes no difference.
3. Divide assets equally
Avoid an uneven division of assets where one spouse is paying money in the future to equalize the division. That equalizing payment is subject to discharge in bankruptcy
4. Secure any future performance with a lien
As a rule, bankruptcy doesn’t alter liens in assets that secure debts: liens survive the bankruptcy. And Supreme Court decisions insulate liens created in the division of martial property from being avoided in bankruptcy. So, if you can’t achieve an even division, grant the spouse to whom the equalizing payment is owed a lien on the assets awarded to the other.
5. Reserve support
After a bankruptcy discharge, the family court cannot attempt to make things “right” between the spouses by revisiting the division of assets and debts. But a family court can award support to the spouse whose right to an equalizing payment was discharged, or whose protection from other creditors was wiped out in the ex’s bankruptcy. Reserving an award of support until the non support financial obligations of the spouses to each other are satisfied gives the family court a tool to grant some relief to the non bankrupt spouse.
What isn’t at risk in bankruptcy
There are things that you can scratch off your list of bankruptcy worries. None of the debts between spouses that arising from the divorce are dischargeable in Chapter 7 bankruptcy. So if your ex files Chapter 7, all of the obligations owed to you will survive.
And there will be fewer creditors the ex has to deal with other than you after a bankruptcy discharge.
Bankruptcy is no threat to support. Whether it’s called family support, child support, alimony, spousal support, or maintenance, the obligation to pay support simply is not dischargeable in any form of bankruptcy.
The automatic stay that is created when someone files bankruptcy does not stop proceedings for custody, visitation, paternity, alternation of status, and collection of support from assets that aren’t “property of the estate“.
If you plan during the divorce with the possibility of a Chapter 13 in mind, you can minimize your exposure to bankruptcy-induced change.
Image courtesy of Flickr and David Goehring