Litigation
| Divorce & Bankruptcy: fraternal (but not identical) twins |
| Published Monday, January 19, 2009 |
There is an inherent conflict between bankruptcy and family. This article explores that conflict and the forms of relief provided to parties seeking to end their marriage. The primary problem with the pre-Act law related to inter-spousal discharge of debts, and debts owed former spouses and children as part of a divorce decree, marital settlement agreement and other similar court orders (collectively hereinafter referred to as "support obligations"). Too often, before enactment of the law, the bankruptcy process was seen and used by many as a tool to avoid family support obligations imposed upon them by the court order after a marital dissolution.
Discharge of Support Obligations Prior to the Act
Previously, the Bankruptcy Code governed the dischargeability of support obligations. It provided that an individual was not discharged from a support obligation debt to a spouse, former spouse, or child of the debtor, for alimony, maintenance, or support, in connection with a separation agreement, divorce decree, marital settlement agreement, or other order of a court of record. While support obligations could not be discharged, other problems existed. Prior law applied to existing support obligations at the time of the bankruptcy filing; for example, if a marital settlement agreement was not signed or a final judgment entered at the time of bankruptcy, a debtor could avoid paying ordered support obligations. In addition, the agreement or judgment had to expressly designate the debt as alimony or spousal support; unfortunately, these provisions did not apply to ordered or negotiated settlements of equitable distribution.
Discharge of Support Obligations After the 2005 Act
The Act dramatically altered the landscape of dischargeability of debts arising from dissolved marriages. A section has been added to the Code that defines the term "Domestic Support Obligation" to mean a debt that accrues before, on, or after the bankruptcy filing date, including accrued statutory interest, consistent with civil judgments. This change applies to debt that is owed to, or recoverable by, a spouse, former spouse, or child of the debtor or such child's parent, legal guardian, responsible relative, or governmental unit. Additionally, the section includes debts that are in the nature of alimony, maintenance or support without regard to whether it is expressly designated and includes debts that are established or subject to establishment before, on, or after the date of filing bankruptcy; for example, under prior law, it was questionable whether support obligations which had not arisen prior to a debtor's bankruptcy would be nondischargeable.
Effects of the 2005 Act
The new definition of a Domestic Support Obligation has been expanded to cover more types of debt and, importantly, makes nearly all of them nondischargeable, thereby eliminating the threat of a bankruptcy discharge of support obligations. While this can create difficulties for those who have suffered from sudden unemployment, sickness or other misfortune, the Act has provided divorce creditors security that prior law failed to render. In addition to securing alimony or spousal support, the Act also makes property settlements in an equitable distribution nondischargeable. It is important to note, though, that the Act is relatively recent law and the courts have yet to settle all the issues arising from its new provisions. That, in turn, may require creditors to file with the court to protect their rights.
The 2005 Act has provided divorced individuals and related parties far greater protection than previously afforded. Now, spouses, former spouses and children of debtors will no longer have to worry as much about the threat of having their financial support and property distributions compromised through bankruptcy proceedings. It is critical to plan for these contingencies and our Litigation Services and financial experts, working as a team with client counsel, have the expertise and experience necessary to assist individuals attempting to reorder their financial lives and provide for the needs of the family faced with the challenges that are the unmistakable footprints of divorce and bankruptcy, even if one causes the other.
Brett E. Burgan, CPA/CIRA is a Supervisor in the Litigation Services Department. He provides forensic accounting assistance to attorneys and their clients in civil matters involving stockholder disputes, breach of fiduciary duty, fraud, embezzlement, and other business-related matters. Brett focuses on uncovering the essential facts of a case by completing a thorough analysis of the financial records, including computerized files. Contact Brett directly by phone at 561.953.1433 or via email using the link above.
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