One of the difficult things about moving on after a divorce is adjusting to living on a single salary. In fact, it’s not uncommon for one spouse—or even both—to file for bankruptcy after the proceeding ends. If the bills start piling up, doing so can provide much-needed relief by wiping out (discharging) obligations such as credit card balances, medical debt, or personal loans. However, an ex-spouse cannot discharge a support obligation—such as child or spousal support—in a bankruptcy case. A property settlement, however, is not protected. It’s dischargeable in a Chapter 13 case.
(You can learn about other debts that won’t go away in bankruptcy by reading Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy.)
After filing for bankruptcy, an order called the “automatic stay” goes into effect immediately. The stay prohibits creditors, such as a credit card company or medical provider, from continuing to collect a debt.
Exceptions exist, however. For instance, maintenance payments, such as child or spousal support, aren’t affected by the stay. Monthly support amounts remain collectible as long as the family law court ordered it (the rule doesn’t apply to informal agreements).
During the divorce, you likely had to divide jointly-owned property and provide financial information so the family law judge could decide whether one spouse had to pay support to the other. As a result, you might have a support order, a property division (sometimes called an “equalizing payment”) order, or both—and want to know what happens in bankruptcy.
Example. When Josh and Caitlyn separated, Josh took a $5,000 commuter car and a $4,000 work truck. Caitlyn kept a $3,000 car that she owned before the marriage. In the family law order, the court awarded Caitlyn a $4,500 property settlement to reimburse her for her ownership interest in the vehicles kept by Josh. The court also ordered Josh to pay Caitlyn $500 per month to help support their daughter. Josh filed for Chapter 7 bankruptcy after the divorce and remained responsible for both the support obligation and the property settlement.
In most cases, you’ll know. Marital settlement agreements and family law orders routinely specify whether the award amount is intended as support or a property settlement.
But sometimes it isn’t easy to tell—or the payment might be incorrectly labeled (intentionally or otherwise). Either way, the bankruptcy court isn’t required to abide by the determination of the state. The court has the authority to decide the nature of the payment independently. When making that decision, the bankruptcy court will likely find that you have a support payment if:
The court doesn’t have the authority to determine whether the amount of the support is—or is not—needed. That determination remains the responsibility of the family law court. As long as the funds are intended for support, the obligation will survive a bankruptcy—regardless of the amount.
In some bankruptcy cases, money is available to pay creditors. In that situation, support arrearages get an extra layer of protection and get paid before any other debt obligations. Here’s how it works.
The court will send out a notice informing creditors that funds are available to pay creditor claims. This type of case is referred to as an “asset” case (as opposed to a “no asset” case).
To receive a portion of the available money, each creditor must fill out a proof of claim form and file it with the bankruptcy court. After the filing deadline elapses, the bankruptcy trustee—the official tasked with overseeing the case—will review the submitted claims. The claims get paid depending on where they fall in a priority ranking system, with claims considered more important (according to the law) getting paid first. Domestic support obligations get paid before other creditor claims.
The bankruptcy process can be complicated for both the person ordered to pay money in a family law proceeding and the recipient. In both cases, it’s important to contact an attorney to discuss what you’ll need to do to protect yourself.
