Til Debt Do Us Part (2) – Chapter 13s

WHAT BANKRUPTCY CAN’T DO: Divorce Debt? Domestic Support Obligations part 3

Bankruptcy helps relieve the burden of credit card and loan debts, medical bills, back utilities and rent, and so forth.

But there are some debts that bankruptcy does not affect; that are “immune” from a bankruptcy discharge – the word is “non-dischargeable”. This means that when the smoke clears and the bankruptcy is over, these debts will still have to be paid.

My previous blogs were about taxes, traffic fines, speeding tickets, student loans and all the various types of what I call Intentional Debt. Lately my focus has been on Child Support/Alimony/Maintenance/Domestic Support Obligations. Last time we talked about these debts surviving Chapter 7.

But a Chapter 13 is different. If a debt from a divorce decree or settlement is in the form of a property settlement it is NOT a DSO is therefore IS dischargable in a Chapter 13 case.

It may be a DSO in a Chapter 7, but NOT a DSO in a Chapter 13.

Huh?

Case law has developed a thorough test to distinguish a DSO from a property settlement agreement. It is a huge list of factors that the judge needs to review.

  1. Whether the settlement agreement includes payment for the ex‐spouse;
  2. Whether there is any indication that provisions within the agreement were intended to balance the relative income of the parties;
  3. The position of the assumption to pay debts within the agreement;
  4. The character of method of payment of the assumption;
  5. The nature of the obligation;
  6. Whether children resulted which had to be provided for;
  7. The relative future earning power of the spouse;
  8. The adequacy of support absent debt assumption;
  9. The parties’ understanding of the provisions;
  10. The label of the obligations;
  11. The age of the parties;
  12. The health of the parties;
  13. Existence of “hold harmless” or assumption terminology;
  14. Whether the assumption terminated upon death or remarriage;
  15. Whether the parties had counsel;
  16. Whether there was a knowing, voluntary, and intelligent waiver of rights;
  17. Length of the marriage;
  18. Employment of the parties;
  19. The demeanor and credibility of the parties;

***

Some examples:

  • A couple has been married for 30 years, since they were teenagers. He went to college and makes $200,000.00 per year. She never went to college and was a stay-at-home Mom and raised the kids. He was ordered to pay the credit cards but then files bankruptcy. She objects to the discharge of these credit cards. This one is pretty easy and leans in her favor.
  • Both couples make $50,000.00 per year and will likely remain at their jobs for many years to come. She was ordered to take on all the credit card debt in exchange for an agreement to NOT pay any alimony or maintenance to her spouse. She files bankruptcy and the spouse challenges the discharge of the debt. This leans in the spouse’s favor.
  • At the time of the divorce both of the divorced couple made $50,000.00 per year and the joint debts were divided more or less evenly. A year later, she lost her job and after months of searching took a job for $25,000.00 per year. She also incurred a lot of medical bills since the divorce due to her chronic illness and lack of insurance. She filed bankruptcy and he challenges the discharge of their debt. This liens in the Debtor’s favor.
  • One spouse agrees to take on all the credit card debt. He files bankruptcy the next day. It has been proven that he consulted with a bankruptcy attorney months ago and has planned to file all along. This leans in favor of the other spouse, too.

Fair to say only about 1% of the cases are this easy. Most are very complicated and each factor has to be weighed.

No one factor carries more weight than another. The bankruptcy judge is given a lot of latitude in reviewing all the factors and how much weight to give each one. You can have all 19 factors on your side plus plenty more and the judge could still rule in favor of your ex-spouse for the reason that something doesn’t seem right.

***

 So what happens in your Chapter 13 regardless of how the debts are determined?

If the debts are ruled as a property settlement the bills are paid with other unsecured debts and discharged after the bankruptcy is completed.

If the debts are ruled as DSOs, they have to be paid as priority unsecured debts. This means they have to be paid in full during the life of the Chapter 13 bankruptcy. Unpaid interest survives. This means even if you pay the entire $10,000.00 in credit card debts you may still owe thousands of dollars in interest when the Chapter 13 is complete.

This may make your plan payment difficult to pay. Those $10,000.00 in DSOs could be as much as $300.00 per month in a 36-month plan. Add your car payment, the house payment, back taxes owed and other fees and your Chapter 13 payment may be unaffordable – the legal phrase is infeasible.

Unless there is another reason to remain in a Chapter 13, you should consider converting to a Chapter 7 and pay the debt on your own terms.

***

A good local bankruptcy attorney will have the experience and knowledge of your district to advise you how the bankruptcy judge of that district views and reviews these factors.

Copyright 2016 Michael Curry

***

About the author: Michael Curry of Curry Law Office in Mount Vernon, Illinois has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

tags: Bankruptcy Attorney Lawyer Mount Vernon Illinois Centralia Fairfield Carmi

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