The advent of the BAPCPA (Bankruptcy Abuse and Consumer Protectioni Act) of 2005 brought some changes to the treatment of domestic obligations within the context of a bankruptcy case. Changes were also made to the operation of the automatic stay within the context of divorce proceedings, property divisions, and the modification of child support orders.
Under 11 U.S.C. Section 104(14A) of the Bankruptcy Code, a domestic support obligation (“DSO”) is defined as any debt that accrues before, on, or after the bankruptcy filing, including interest on the debt, that is:
1. Owed to or recoverable by a spouse, former spouse, or child of the debtor or such child’s parent legal guardian or responsible relative or a governmental unit;
2. That is in the “nature of alimony, maintenance, or support” of such spouse, former spouse or child of the debtor or the child’s parent;
3. Established by a separation agreement, divorce decree or property settlement agreement.
In practice, the key issue here is that the bankruptcy court will look to the actual purpose of what the debts were intended for. Where they intended to be in the nature of “support” or “maintenance”? The labels put on a debt in state court are not necessarily binding. The bankruptcy court will look to the underlying purpose of the debt. For example, the 11th Circuit Court of Appeals has held that a debt is in the nature of “support” or “alimony” if at the time of its creation, the parties intended the obligation to function as support or alimony. Cummings v. Cummings, 244 F. 3d 1263, 1265 (11th Cir. 2001).
So, the bottom line is that the bankruptcy court will generally defer to the state court divorce decree, but it is not required to. Thus, in a typical personal bankruptcy, if a debt was intended to be a form of support or maintenance to a former spouse as part of a marriage dissolution agreement, it will not be dischargeable.
However, a Chapter 11 or Chapter 13 case could be used to get current on any arrearage in such a debt as part of a reorganization plan, and the automatic stay would protect the debtor from collection activities. Also, in divorce or separation proceedings it is not uncommon for one spouse to agree or be ordered to hold the other spouse harmless from one or more debts or obligations. Whether such “hold harmless” provisions will remain effective is a complicated matter.
Property divisions can also be excepted from discharge in Chapter 7. A debtor’s obligation to pay marital debts directly to a third party (called a “hold harmless” obligation) such as to pay the mortgage on a former marital residence and to hold the former spouse harmless on this debt might also deemed to be non-dischargeable, as long as the obligation has the effect of providing support to the former spouse.
In practice, we have found that these types of expenses are generally considered to be in the nature of “support” to a former spouse: (1) educational expenses of a minor child; (2) medical insurance coverage for a minor child; (3) life insurance obligations with minor children as beneficiaries. Divisions of pensions through a Qualified Domestic Relations Order (QDRO) are also not debts that can generally be dischargeable.
In a Chapter 13 case, a delinquent domestic support obligation, such as child support or alimony, is classified as a priority debt and paid as such in a Chapter 13 or Chapter 11 plan. If a debt to a former spouse is not a true domestic support obligation, it is dischargeable. A plan will not normally be confirmed unless the plan provides for the payment of any domestic support obligation arrearage during the life of the plan.
The debtor will also need to provide for ongoing support obligation payments. To be eligible for a Chapter 13 discharge, the debtor needs to certify that all domestic support obligations have been paid and that the debtor is current on these obligations.
The automatic stay that commences with the filing of a case will stop most legal proceedings. It will not stop a proceeding to establish paternity (these are not often encountered in the bankruptcy process), to establish or modify a child support order, to determine custody or visitation issues, or to dissolve a marriage, except to the extent that such a proceeding may seek to determine a division of marital property in which the bankruptcy estate may have an interest.
In practice, in Kansas and Missouri, bankruptcy judges want debtors to file motions for relief from the automatic stay before proceeding on marital issues in state court. They want creditors and trustees to know what is going on, so that no confusion or misallocation of estate assets occurs. If you have an issue with this area of the law, you need an experienced bankruptcy attorney. Call us today for a free consultation.