Non Support Debts In Bankruptcy: Our Options Have Changed

Wrong Way
Read the case annotations for Section 523(a)(15)of the Bankruptcy Code casually, and you can go really wrong.

It’s like the phone tree admonition:  listen carefully because our options have changed.

Before 2005, the dischargeability of non support obligations to former spouse or child incurred by the debtor in the course of divorce might be dischargeable, based on a weighing of the hardships.

If the non filing spouse missed the deadline to file an adversary proceeding for a determination of the dischargeability, the debt was wiped out.

No more.

Changed by bankruptcy reform

Debts, not in the nature of support, incurred in divorce to a spouse, child, or former spouse are now flat out non dischargeable.

This most often involves obligations on the division of property and obligations to hold the other party harmless from marital debts.

It is no longer necessary for the non filing spouse to initiate an adversary proceeding for a determination of the hardships presented by discharge.

If it’s incurred in the divorce, it’s non dischargeable.  So you can disregard most of the cases on §523(a)(15), exploring relative benefits and detriments and  how the income of a subsequent live in is treated.

Bankruptcy discharge and indemnity

The debt that §523(a)(15) makes non dischargeable is the obligation to the former spouse to hold the spouse harmless.

The debtor’s personal exposure to the third party creditor remains dischargeable.

The obligation to indemnify only comes into play when the spouse experiences harm or damage by reason of a debt to a third party. The debtor may, in fact, never be called on to perform on the indemnity.

So, the debt that lives on is only the one owed to the spouse to hold harmless should the spouse suffer harm.

Was it incurred in divorce

I ran smash into a very expansive Ninth Circuit case addressing whether an obligation was incurred in.

The debt between the spouses in my case existed long before the parties contemplated divorce.  A second marriage for both, one spouse agreed to repay the other for community funds used to improve the other’s separate property.

In Short v. Short, the appeals court held that a preexisting debt between the spouses was within the scope of §523(a)(15) because it was addressed by the judgment of divorce.  Short has been cited or followed in most other circuits.

Takeaway:  you’ve got to read the marital settlement agreement or judgment of divorce before going too far.

It’s different in Chapter 13

Once again, the world is different in Chapter 13.

Section 1328, defining the Chapter 13 discharge, omits §(a)(15) from the list of debts not discharged by a Chapter 13 discharge.

Property divisions, indemnification agreements, and obligations to pay others, not in the nature of support, are dischargeable.

Once again, a great reason to choose Chapter 13.

The Bankruptcy Family Law Series:  ♦ Spouses as source of Conflicts   ♦ Starting with support  ♦ Shadow players with support claims

Image courtesy of Flickr and Elaine with Grey Cats.