Dischargeable debts in divorce--the dissolution of dischargeability.

Author:Tiso, Christopher A.
Position:Family Law
 
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We all know that support-related obligations, typically alimony, maintenance, child support, and sometimes attorneys' fees emanating from a marital settlement, separation agreement, or divorce decree or judgment are not dischargeable in bankruptcy under [section]523(a)(5) of the Bankruptcy Code. (1) Many believe, however, that nonsupport-related debts, such as credit card obligations, notes secured by mortgages, automobile loans, and equitable distribution payouts and obligations are dischargeable. Although that may have previously been the case, it is no longer true. Virtually all obligations and debts of whatever kind or nature flowing from a divorce are now non dischargeable in bankruptcy, a change of which family law practitioners and judges should be aware.

The BAPCPA

In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). As part of the BAPCPA and the recognition by Congress that "the economic protection of dependent spouses and children under state law is no longer accomplished solely through the traditional mechanism of support and alimony payments," (2) [section]523(a)(15) was revamped. The law was significantly changed to further the underlying public policy of [section]523, favoring the enforcement of familial obligations over the Bankruptcy Code's "fresh start policy." (3) The law applies to all bankruptcy cases filed on or after October 17, 2005.

Historical Perspective

Section 523(a)(15), first implemented in 1994, excepted nonsupport-related debt from discharge unless 1) the debtor did not have the ability to pay the debt from income or property not reasonably necessary for the support of the debtor or a dependent of the debtor, or 2) if discharging such debt would result in a benefit to the debtor that outweighed the detriments to a spouse, former spouse, or child. These factors were considered "affirmative defenses." If established, these factors permitted the court to discharge property settlement obligations and the like, notwithstanding the obligation may otherwise have qualified as a nondischargeable debt within the scope of [section]523(a)(15).

The BAPCPA of 2005 eliminated these affirmative defenses, rendering virtually any debt or obligation falling under [section]523(a)(15) absolutely nondischargeable. As one court succinctly noted:

Under the former version of [section]523(a)(15), the [c]ourt would be required to assess whether the award constitutes maintenance, alimony or support, which are automatically non-dischargeable, as opposed to some other form of debt for which the merits of a discharge would have to be weighed through a multi-factor balancing test.... However, BAPCPA makes this evaluation process largely irrelevant since currently any debt arising from a divorce proceeding which would not fall under [section]523(a)(5) is nevertheless excepted from discharge under [section]523(a)(15). (4)

Simply stated, under current [section]523(a)(15), a debtor may not receive a discharge if the debt is "to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree, or other order of a court of record." (5)

Family law practitioners and state court judges exercising concurrent jurisdiction with the bankruptcy court (6) must use caution not to cite or rely upon cases that may no longer be good law due to the BAPCPA, a certain trap for the unwary. (7)

Moreover, practitioners and judges alike must be cognizant that even under the BAPCPA, there is still an important distinction between a Ch. 7 and individual Ch. 11 proceeding and a Ch. 13 proceeding. Stated succinctly, a consumer debtor may choose to liquidate under Ch. 7 or reorganize under Chs. 11 or 13 (depending on the amount of outstanding indebtedness). (8) A consumer debtor who successfully liquidates under Ch. 7 will receive a discharge, which is effectuated by the entry of a discharge order. (9) A consumer debtor who successfully obtains court approval of a reorganization plan under Chs. 11 or 13 generally will receive a discharge following the completion of all payments required by the plan. (10) As in a Ch. 7 proceeding, domestic support obligations may not be discharged in a Ch. 13 proceeding. (11) However, unlike a Ch. 7 proceeding now under the BAPCPA, other types of obligations and debts arising out of a separation or divorce, including property settlements, are still dischargeable in a Ch. 13...

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