From a family law perspective, it is important to realize that certain types of debt are not dischargeable in Bankruptcy. These include certain tax obligations, obligations incurred as a result of fraud or criminal activity, alimony, child support and certain property settlement obligations. Importantly, student loan obligations are nondischargeable in bankruptcy court.
It is also worth noting that some assets are considered exempt in bankruptcy court. These are assets that cannot be taken from the debtor. These include one’s homestead and pension benefits.
There are generally speaking two types of bankruptcy proceedings: Chapter 7 and Chapter 13. In a Chapter 7 case, the trustee collects any non-exempt assets of the debtor and converts those assets to cash, and distributes that cash to the creditors. The debtor gives up all of the non-exempt assets he or she owns in order to obtain a discharge.
In a Chapter 13 case, the creditors look to the future earnings of the debtor, not the property of the debtor, to satisfy their claims. The debtor retains his or her assets and makes payments to creditors, from money earned after the bankruptcy is filed. There is a plan of repayment developed in this type of proceeding. A plan can last as long as five years. Within this time period, arrearages for child support and alimony must be paid. A foreclosure of a home can be stopped as long as the arrearage is paid within the five-year repayment period.
One important aspect of a bankruptcy proceeding is the automatic stay provision. With this provision, all state court actions, including divorce proceedings are halted. In order to proceed with a dissolution of marriage action once a bankruptcy proceeding has begun, where money or property are involved, it is necessary to apply to the bankruptcy court for an order lifting the stay.
There is no stay of a proceeding that involves the following: paternity, parenting issues including visitation or domestic violence issues.
As previously mentioned, alimony and child support obligations are not dischargeable in bankruptcy. However, the bankruptcy court will look to the intent of the parties and make its own evaluation of whether an item is truly a support obligation. Drafters of documents cannot simply label an obligation as support when this is not the true nature of the obligation.
Also, one spouse in a family law matter may be ordered to pay the other spouse’s attorney’s fee. If that fee was to effectuate a support obligation, it is not dischargeable in the payor spouse’s bankruptcy proceeding. In other words, such fees need to be intertwined with the support obligation as to be in the nature of non-dischargeable support.
The intersection of family law and bankruptcy law is a very fertile and interesting place for the legal practitioner.1