September 24, 2017

Domestic Support Obligations: Is Bankruptcy a way to get Relief ?

Chapter 7 and Chapter 13 bankruptcy laws are unanimous on the question of spousal supportThis post addresses the situation in which an individual is obligated to pay one or more types of domestic support obligations and cannot do so.

What are “domestic support obligations?” They arise in the context of domestic disputes. For the most part, they consist of three things:

  1. Alimony which is support that one spouse is required to pay for the support of his or her spouse
  2. Child support which is support paid by a parent to the other parent for the support of their children, and
  3. Equitable distribution which is related to a division of property owned by them or them.

Domestic support and bankruptcy

I am frequently asked whether or not bankruptcy can relieve domestic support obligations. In other words, are domestic support obligations dischargeable in bankruptcy?

Note that “discharge” means that the discharged debt no longer exists.

The answer is that generally domestic support obligations are not dischargeable in bankruptcy. Generally, bankruptcy will not make them go away. However, there is more to the story than that.

Chapter 7 bankruptcy: domestic support is prioritized

Domestic support obligations are simply not subject to discharge in a Chapter 7 bankruptcy case. This is true regardless of the type of support is involved. Remember that in a Chapter 7 case the debts cease to exist, and the only payments to creditors come from liquidating property of the debtor.

That having been said, a Chapter 7 bankruptcy case may be of assistance when a debtor has property that can be liquidated to pay his or her debts. The reason is that domestic support obligations have a higher priority than most other obligations.

As a matter of fact, domestic support obligations are second in line to payment after only the cost of administering the bankruptcy estate. Thus, a Chapter 7 bankruptcy could mean that only the holder the domestic support obligation would be paid and no other creditor would.

Chapter 13 bankruptcy: a way to re-structure some domestic support

The blanket statement that domestic support obligations are not dischargeable does not apply in a Chapter 13 bankruptcy case. In a Chapter 13 case, the debtor makes payments from income earned after filing for a period of time in accordance with a Chapter 13 plan.

Whether or not the domestic support obligations can be discharged depends on the type of obligation and the terms of the plan.

As to the type of obligation, only equitable distribution claims are subject to discharge. As in Chapter 7, alimony and child support are not dischargeable.

Equitable distribution claims are dischargeable if the debtor uses his or her best efforts to pay as much as possible through the plan to the domestic support claimant. This means that the payment must be substantial relative to the income of the debtor; and as a general rule, the plan must run for the maximum period allowed which is five years.

Case study: Discharging equitable distribution claims in Chapter 13

Here’s an example for what type of equitable distribution situation would justify a Chapter 13 filing.

Let us say that a physician with a substantial income is subject to an equitable distribution award in a domestic judgment. As a part of the judgment, the physician’s medical practice has been valued at $1,000,000 and he has been ordered to pay one-half of that amount over a period of ten years to his ex-spouse.

Let’s say his actual income is $200,000, and after tax income is $130,000 per year. His living expenses including alimony and child support amount to $125,000. This guy could squeeze out another $10,000 a year and pay his ex-spouse $15,000 in a Chapter 13 plan for a period of five years.

If the Court found that this constituted his best efforts, the unpaid balance of the equitable distribution award would be discharged.

There is not a great deal of help in bankruptcy for the debtor suffering under the burden of impossibly-high domestic support obligation payments. Nevertheless, there are some specific situations in which bankruptcy can make a world of difference.