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 provisions can be "discharged" or wiped out. But not all. What the bankruptcy court will discharge will depend on whether the debt is a domestic support obligation (DSO) and whether the debtor filed the bankruptcy case in Chapter 7 or Chapter 13.

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 do the following:

• 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. Learn why it's often better to file for bankruptcy before divorcing in Divorce & Bankruptcy: Which Comes First?

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 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 providing future support, such as child or spousal support. These obligations won't be discharged in a bankruptcy case. Learn more about nondischargeable debt in bankruptcy.

Property Division Provisions Might Get Wiped Out

By contrast, bankruptcy law doesn't protect property division agreements. But knowing whether an agreement provision provides 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 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.

For instance, suppose it is apparent in the agreement that the payment is to pay for the timeshare and not for support. In that case, the debt might be dischargeable in bankruptcy. (More examples are 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 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 during a divorce or separation. (11 U.S.C. § 523(a)(15). Together, these two provisions are broad enough to capture virtually any agreement a divorcing couple makes. So, absent a unique argument, you won't 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 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.

Consult a Bankruptcy Lawyer

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

Need More Bankruptcy Help?

Did you know Nolo has made the law easy for over fifty years? It's true, and we want to ensure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.