Bankruptcy and Divorce: Some Payments in a Divorce Decree May be Dischargeable in Chapter 13
The rule of thumb is that bankruptcy will discharge most unsecured debts that are not taxes or domestic support obligations (which are two of the most common “non-dischargeable debts” that will survive a bankruptcy). This means that child support, domestic support owed to an ex-spouse and many taxes are never discharged in any form of bankruptcy. However a fine line can be drawn where some payment obligations in a divorce decree can still be discharged, but only in a Chapter 13 bankruptcy.
The divorce obligations that can be discharged in Chapter 13 bankruptcy (but not in Chapter 7) are payments that relate to property settlements such as a cash equalizer. Cash equalizers are common, for example, when there is equity in a homestead that needs to be fairly divided between the spouses when one spouse will stay on deed to the home. The general standard for discharging these types of divorce-related obligations is whether the payment is “domestic support” in nature (non-dischargeable) or is more of a property settlement (dischargeable).
In Chapter 13 cases, payments due to an ex-spouse on account of a property settlement are not allowed in the debtor’s budget since these obligations typically are considered general unsecured debt similar to a credit card. Also like a credit card, the ex-spouse can file a proof of claim in the Chapter 13 case to claim their right to receive a proportionate distribution paid to all unsecured creditors, with any amount unpaid being discharged at the end of a successfully completed Chapter 13 plan. While usually this distribution is only fraction of the amount that is owed, unsecured creditors may nonetheless file a claim.
Support obligations are never dischargeable in any form of bankruptcy and a Chapter 13 debtor will be expected to continue making these payments during the course of their Chapter 13. These include child support and domestic support owed to an ex-spouse, but not necessarily property settlements, cash equalizers and possibly other payments owed.
Located in Edina, Minnesota, Lynn Wartchow represents clients in all Chapters of bankruptcy in Minneapolis, St. Paul, Ramsey and Hennepin County, and throughout Minnesota.
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