Bankruptcy and divorce: can the bankruptcy court step in and re-do your divorce settlement?

Bankruptcy and divorce — those handmaidens of a whopping mid-life crisis — are serviced by competing court systems with competing and confusing rules and requirements. Here is a guide to (at least partially) untangling the mess.

First, since 2005 there has been a notion in the bankruptcy courts of something called a “domestic support order,” often given the government-style acronym “DSO.”

In the old days, this was called “child support.” It isn’t dischargeable in bankruptcy then or now. In fact, arrears are treated as priority debts, which means they must be paid off . . . with priority. The real kicker is that the expansion of child support into DSO and its broader definition has sometimes spawned creative litigation about what is a DSO and what isn’t. For example, are attorney’s fees for fighting over support issues in Family Court a DSO, too.  You would be surprised at some of the answers judges have given to that one!

Now, what about purely property settlements? In the old days (before 2005, that is) sometimes these could be altered or eliminated with a Chapter 7 bankruptcy case. No more — now all debts to a spouse, former spouse or a child, incurred in connection with a divorce or separation are non dischargeable in Chapter 7.

But there may be a loophole (and you know how much lawyers like loopholes)! It’s called Chapter 13, where the Chapter 7 rules don’t necessarily apply. Specifically, all debts provided for by a Chapter 13 plan are dischargable, with certain exceptions . . .and the Chapter 7 property settlement exception isn’t one of them.

If you are troubled by a property agreement in a divorce case that doesn’t seem right, it might be worth checking with a bankruptcy attorney to see if you would be a good candidate for Chapter 13, which could supply an effective solution.

 

By Doug Beaton

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