Spousal and Child Support & Bankruptcy
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) places a claim of unpaid child support and alimony ahead any other creditors’ claims, even taxes.
Support is the first to be paid out of any bankruptcy filing. Any support arrearages survives a bankruptcy without the need for a dependent going to bankruptcy court to argue the matter. However, the person owed support, either child support or alimony must file a proof of claim with the bankruptcy court to receive payment.
BAPCPA requires that if there’s a claim for a domestic support obligation in a case, the trustee in bankruptcy, to give the claimant (who is the noncustodial parent) and her state’s Child Support Enforcement Agency written notice of the bankruptcy and any discharge given to the ex-spouse.
Under BAPCPA, the obligation to pay child support or alimony is not dischargeable. BAPCPA does not differentiate between alimony or child support and debts that are the result of property settlements. The latter used to be, in certain circumstances, a dischargeable debt; neither can be discharged under BAPCPA.
Under BAPCPA, the trustee in Chapter 7 and Chapter 13 bankruptcy cases are required to disclose certain information to a support creditor, who is usually the ex- or separated spouse, including the most recent known address of the debtor.
Filing Bankruptcy Before Divorce
Most divorce and bankruptcy lawyers suggest that struggling couples make a smooth and clean break by filing for bankruptcy before filing for divorce.
Start to finish, a divorce becomes much cleaner and easier with no debt obligations to distribute, particularly when spouses can come together and work towards a fresh start for both of them. Filing bankruptcy before divorce helps ensure that happens.
It almost always makes sense because filing bankruptcy means that all joint and individual debt is discharged in the action, so there is be no lingering joint debt that the non-filing spouse is responsible for.
Also, in the vast majority of cases, the spouses should file for bankruptcy before filing for divorce because when they file for bankruptcy jointly they pay one filing fee instead of two individual filing fees. Moreover, filing jointly means paying one attorney fee (and reaping significant savings).
The joint filing also makes for a larger household size, which works to the advantage of the filers who pass the means test and qualify for Chapter 7 Bankruptcy.
Filing Bankruptcy After (or During) Divorce
Filing for bankruptcy after or during a divorce make makes the action more difficult, particularly for the majority income earner, who may not be able to qualify for an easier Chapter 7 Bankruptcy.
Moreover, debt divided and assigned following a divorce decree is owed by one spouse to the other, and is not dischargeable in bankruptcy. Some people believe that filing bankruptcy after divorce means they can avoid support obligations. Bankruptcy provides no safe harbor from child support and alimony.
In addition, filing for bankruptcy during a divorce triggers an automatic stay and halts the action, which drags out an already painful action and makes it longer. Further, bankruptcy does not wipe the slate clean.
When Bankruptcy and Divorce Go down the Aisle
When it looks like a divorce and a bankruptcy are on the horizon, spouses would do well do review the basics of debt, divorce and bankruptcy.
Joint debt is a joint responsibility. When both spouses sign for a loan, a debt (for example, a mortgage or car loan), both may both be responsible for that debt even after the divorce. In other words, even if the court deems that one spouse is responsible for paying, the credit rating of both spouses might be affected should the loan go into default because of what is called joint and several liability.
For this reason, the spouses should memorialize an agreement about which of them is responsible for what debts. The bankruptcy lawyer who may have helped them file jointly, however, cannot help them because he or she is in conflict of interest and cannot act in a way that is detrimental to either spouse. So when parties want to legally divide payment responsibilities, they must turn to another lawyer to write the agreement.
Conflicts become particularly important during the three- to five-year repayment period of a Chapter 13 bankruptcy. In a Chapter 13 action, the parties must maintain their repayment schedule: If someone misses a payment, the bankruptcy trustee can move to dismiss the case, which removes the court’s protection and the chances of getting a bankruptcy discharge.