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?)
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:
It's common for bankruptcy to follow a divorce. How the bankruptcy will affect an agreement will depend on its contents.
Domestic support obligations aren't dischargeable in bankruptcy. The bankruptcy code defines a domestic support obligation (DSO) as a debt that is:
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.
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.)
You'll likely have to file for Chapter 13 bankruptcy if you'd like to wipe out a property settlement obligation. Here's why.
(Learn more by reading The Bankruptcy Litigation Process.)
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.