In most divorce cases, a final judgment of divorce creates monetary obligations from one spouse to the other. These inter-spouse divorce obligations are lawful debts and they are called “claims” for purposes of bankruptcy law. A debtor who files bankruptcy is asking the Court to discharge as many of these divorce “claims” as they can. A person, who is entitled to receive payments from a debtor in a bankruptcy, has a “claim” against that former spouse for the value of those promised payments or transfers.
Debts and claims that arise in a divorce case are usually classified in three ways for bankruptcy purposes; 1) Property Settlements, 2) Domestic Support Obligations (DSO) and 3) Other Non-DSO obligations. Often, a non-DSO obligation to a former spouse may include one spouse accepting full responsibility of the joint debts incurred during the marriage, or to assume their spouses’ debts, or to agree to pay all the costs of both divorce attorneys, but they can take any number of forms. Non-DSO obligations are similar to DSOs because they help one side maintain a certain lifestyle after divorce, but they do not quite meet the bankruptcy definition of a DSO. Can a bankruptcy debtor discharge obligations they owe to a former spouse? Do you know how bankruptcy law treats these obligations? Does your divorce attorney know?
Generally, a divorce judgment provides for a division of marital property, and one spouse is required to turn over certain assets to the other. These obligations are claims too, and under certain circumstances they may be discharged in either a Chapter 7 or Chapter 13 bankruptcy. A divorce judgment may require one spouse to pay Spousal Support (Alimony) and/or Child Support to the other, these obligations are generally called Domestic Support Obligations (DSO). The Bankruptcy Code defines a DSO as a debt that is owed to or recoverable by a spouse, former spouse, or a child, and the child’s parent, legal guardian, or responsible relative that is in the nature of alimony, maintenance, or child support without regard to whether or not the Judgment of Divorce expressly identifies the debt as a DSO. The obligation must be established in a divorce decree, separation agreement, property settlement agreement or an order of a court. A DSO obligation is not discharged in either a Chapter 7 or a Chapter 13 bankruptcy.
This article addresses claims that fall under the third claim type, the Non-DSO, claim. What happens to these claims in bankruptcy? How does one plan for those? Non-DSO claims create opportunities for the knowledgeable and the prepared, and problems for the unprepared. The Bankruptcy Code defines a non-DSO obligation as a claim that is “in the nature of” or is similar to a DSO, but doesn’t fully meet the bankruptcy definition of a DSO. A claim that meets the DSO definition is never discharged in any bankruptcy, but a “Non-DSO claim” may be discharged in a Chapter 13 Reorganization plan. In a Chapter 13 plan, a debtor will make payments to creditors for 3 to 5 years, but in most cases, those payments are not enough to pay all claims in full. It is common to see plans that pay creditors 10% or less of the value of their claims in a Chapter 13. A properly prepared person who has a pending divorce may be able to structure a divorce judgment to preserve their options and protect their ability to discharge some of the obligations they take on during the divorce; or if they expect that they will be the one to receive payments in a divorce judgment, they should take steps to protect themselves so that those payment obligations are not discharged if their former spouse files a bankruptcy in the future.
It is common to see a person file bankruptcy soon after they divorce, so it becomes very important to be prepared for that possibility. It is very important to the person whose divorce judgment will entitle them to receive payments from a former spouse to be careful how their divorce judgment defines, negotiates and structures spousal payments. One entitled to receive payments from a former spouse should seek to ensure that to the extent it is possible, that those payments and transfers meet the bankruptcy definition of a DSO, so that they are not discharged. Likewise, it is very important to the person who must make payments or transfers to their former spouse, to attempt to ensure that these obligations are clearly defined in a divorce judgment so that they do qualify as a non-DSO obligation in order to preserve the right to discharge the debts if a Chapter 13 case becomes necessary.
At Resnick Law, P.C., we help people solve their financial problems, plan for their future and provide advice about assets, income and debts regardless of the circumstances they find themselves in. If you are in a divorce or contemplating one, it is important that you understand that you are preparing for the future and you need to be prepared to protect yourself and your children for whatever the future has in store for you. We recommend that you consult with attorneys who are knowledgeable with the interaction between bankruptcy law and divorce law. If you would like to learn more about the options that might work for your situation, we encourage you to contact us by visiting our website or call us, Resnick Law, P.C., at (248) 642-5400 to schedule a consultation with one of our lawyers.