Can You Prevent a Marital Settlement Agreement From Being Discharged in Bankruptcy?

When one spouse files a bankruptcy case before meeting all obligations under a marital settlement agreement, some of the provisions could be dischargeable (wiped out). But not all. What will—or will not—be dischargeable will depend on whether the debt is a domestic support obligation (DSO) and whether the debtor (the person who filed for bankruptcy) filed a Chapter 7 or Chapter 13 case.

(Learn more about bankruptcy by starting with What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?)

What Is a Marital Settlement Agreement?

When a marriage ends, the spouses often enter into a contract that divides the couple's assets, assigns responsibility for debts, and sometimes provides that one spouse will make payments for the support of the other spouse. The contract is called a marital settlement, a divorce agreement, a property settlement, or something similar.

Most agreements spell out the responsibilities and rights of each spouse. For instance, the agreement could require one spouse to:

• make monthly alimony payments
• sign a deed or car title to transfer ownership
• obtain an insurance policy with the other spouse or a child as beneficiary
• earmark retirement funds to be divided in the future
• liquidate (sell) property and share the proceeds with the other spouse, or
• pay the couple's credit card debts.

It's common for bankruptcy to follow a divorce. How the bankruptcy will affect an agreement will depend on its contents.

Domestic Support Obligations Remain

Domestic support obligations aren't dischargeable in bankruptcy. The bankruptcy code defines a domestic support obligation (DSO) as a debt that is:

• owed to a spouse, former spouse, or a child,
• like alimony, maintenance, or support, regardless of what it's called
• included in a marital, property, or separation agreement, court order, or order from another governmental unit, and
• not assigned to any entity except to collect the debt. (11 U.S.C. § 101(14A)).

This broad definition includes agreement clauses that provide for future support, such as child or spousal support. These obligations won't be discharged in a bankruptcy case.

Property Division Provisions Might Get Wiped Out

By contrast, bankruptcy law doesn't protect property division agreements. But knowing whether an agreement provision provides for ongoing support or a division of assets isn't always easy. In fact, bankruptcy litigation can arise to determine whether a particular obligation will be forgiven in bankruptcy. The filer will have to file for Chapter 13 bankruptcy, however—more on why below.

So what would be considered a property division provision? When a married couple divorces, they divide the property that they own together. For instance, suppose one party keeps the couple's timeshare. To do so, the spouse keeping the asset agrees to reimburse the other spouse over time. If it is clear in the agreement that the payment is to pay for the timeshare, and not for support, the debt might be dischargeable in bankruptcy. (More examples below.)

Which Bankruptcy Chapter Discharges Property Settlements?

You'll likely have to file for Chapter 13 bankruptcy if you'd like to wipe out a property settlement obligation. Here's why.

• Chapter 7 bankruptcy. Discharging a divorce obligation in Chapter 7 bankruptcy is challenging (if not virtually impossible). Chapter 7 bankruptcy doesn't allow the discharge of any debt that fits the bankruptcy code definition of a domestic support obligation. (11. U.S.C. § 523(a)(5). But the rules go even further by excluding all debts incurred in the course of a divorce or separation. (11 U.S.C. § 523(a)(15). Together these two provisions are broad enough to capture virtually any agreement made by a divorcing couple. So, absent a unique argument, you're not going to be able to discharge any dissolution-related obligations in a Chapter 7 case.
• Chapter 13 bankruptcy. Domestic support obligations aren't discharged in Chapter 13 bankruptcy either. But unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy doesn't preclude obligations arising from a property settlement (those contemplated by § 523(a)(15)). These might include an agreement to pay the couple's credit card debts, split proceeds from the sale of property, or list an ex-spouse as a beneficiary on an insurance policy.

(Learn more by reading The Bankruptcy Litigation Process.)

Consult With a Bankruptcy Lawyer

Keep in mind that many people negotiate agreements to substitute a split of property instead of a monthly alimony payment. For example, the couple could decide that the one party will take ownership of the family home rather than regular support payments. Bankruptcy courts can scrutinize property settlement agreements to discern the intent of the parties regardless of the language used.

Working through the dischargeability of a property settlement agreement is one of the trickier issues in bankruptcy, and it is advised that you seek the advice of a bankruptcy litigation lawyer.