Congress has declared that debtors usually cannot get rid of domestic (family court) obligations in bankruptcy.
When Chase or Wells Fargo extends credit, they know there is a risk that the borrower will not be able to repay the debt. They continue to make loans because, as a matter of business judgment, the interest and fees they charge make these transactions worth the risk. But domestic creditors – spouses, former spouses, and children of the debtor – never get to make that choice, and the effect of non-payment of a domestic obligation is usually much more damaging than non-payment of a commercial debt.
Whether a family court obligation is dischargeable depends on the type of bankruptcy the debtor files and the nature of the obligation.
In Chapter 7, it’s simple: no domestic obligations of any kind are dischargeable. As long as the obligation is written into a divorce decree, family court order, or separation agreement, it survives.
It’s different in Chapter 13. Support-type obligations – alimony, child support, and other payments intended to support the spouse, former spouse, or child – are not dischargeable. But other obligations, including property division and related payments, are dischargeable. Sounds simple enough, right? It isn’t.
First of all, what the decree or agreement calls the obligation doesn’t necessarily govern: it’s the real purpose that matters. Something can be called “rehabilitative alimony” when it’s really intended to equalize the division of property.
In addition, lawyers who draft separation agreements and courts that issue divorce decrees often set out obligations with no indication of their nature or purpose. Take for example the couple from Orangeburg, whose divorce decree contains a “hold-harmless” paragraph requiring the husband to pay three joint debts – with no further explanation. Was the husband required to pay the debts (1) so the wife could maintain a reasonable standard of living, or (2) because he got most of the marital property, or (3) because his misconduct caused the breakup of the marriage? With #1, it’s probably “in the nature of support” and therefore non-dischargeable. With # 2 or #3, it’s probably dischargeable. But it’s usually hard to tell for sure.
The problem doesn’t just arise with the allocation of joint debts.
Lots of other common obligations don’t fall neatly into the property category or the support category. These include requirements to pay the other spouse a sum of money, to pay his or her attorney’s fees, to keep a life insurance policy in force, to sign over the tax refund, or to deed over the marital home.
There are literally hundreds of court opinions deciding whether particular obligations are “in the nature of support.” Not all reach consistent results. So when we advise clients whether a domestic obligation in is dischargeable in Chapter 13, we are necessarily dealing in probabilities rather than certainties.