Discharge of Family Law Obligations in Bankruptcy

The discharge applies to all debts of the debtor, with the exception of debts that are characterized as nondischargeable by 11 U.S.C. ' 523. The two important categories of nondischargeable debt for the family law practitioner are obligations in the nature of support, such as alimony and child support, 11 U.S.C. ' 523(a)(5), and those family law obligations that are not support, 11 U.S.C. ' 523(a)(15). The latter provision was added in 1994 in order to exclude from discharge nonsupport items, such as indemnification agreements contained in property settlement agreements. The question of whether an obligation is in the nature of support for purposes of 11 U.S.C. ' 523(a)(5) is a question of federal law, not state law, and is inherently fact specific. The net effect of these exceptions from discharge, particularly after BAPCPA, has been to exempt most family law obligations from discharge.

The concept of discharge of debt must be distinguished from the concept of priority, although there is some interplay between the two. Dischargeability involves a determination of whether the debtor will continue to be responsible for the obligation after the completion of the bankruptcy. Priority determines a creditor's ranking in the pecking order of those who get paid from a debtor's bankruptcy estate. Prior to BAPCPA, support obligations such as alimony and child support, but not other family law obligations, received an eighth level administrative priority, which meant that such obligations were paid ahead of unsecured creditors but not much else. Under BAPCPA, support obligations receive a first level administrative priority, subject to a minor carve-out for the trustee's administration of assets used to pay this obligation. The treatment of support obligations as an administration expense is very important in Chapter 13 and Chapter 11 cases, as the plans must provide for payment of administration expenses in full. The administration priority is of less value in a Chapter 7 case, unless there are assets available for distribution to creditors. Thus, in a Chapter 7 case, the issue of nondischargeability is critical because it allows the nondebtor former spouse to pursue the debtor after discharge. In that situation, the debtor spouse should have more available resources after discharge as his other creditors may be enjoined from collecting prepetition debts.

Obligations for Cases Filed Before the Effective Date of BACPA

Under the prior form of 11 U.S.C. ' 523(a)(5), obligations for alimony, maintenance and child support pursuant to a separation agreement, divorce decree or other court order were not dischargeable, provided that such obligations were in fact alimony, maintenance or support and had not been assigned to a governmental unit. The bankruptcy court and the state court had concurrent jurisdiction over the issue of nondischargeability. There was no time limit for seeking a determination of nondischargeability. Thus, the nondebtor spouse could seek a determination of dischargeability in state court long after the debtor spouse had otherwise been discharged in bankruptcy.

Under former 11 U.S.C. ' 523(a)(15), all other obligations incurred in the course of a divorce or separation could be nondischargeable, unless the debtor did not have the ability to pay the obligation, or the benefit of discharging the obligation outweighed the detriment to the nondebtor spouse or child. The bankruptcy court had exclusive jurisdiction of nondischargeability actions under this section. Moreover, the objecting spouse had to file the nondischargeability adversary proceeding within sixty days of the first meeting of creditors. As a practical matter, the nondebtor spouse would also join the 523(a)(5) claim as well in order to avoid joinder issues.

Discharge Under BAPCPA

The BAPCPA amendments made it easier for the nondebtor spouse to prevent the discharge of a family law action. 11 U.S.C. ' 523(a)(5) now simply provides that a debt for a domestic support obligation is not discharged. Domestic support obligation is defined in 11 U.S.C. ' 101(14) and includes any obligation in the nature of alimony, maintenance or support, without regard to whether the debt is expressly characterized as such. 11 U.S.C. ' 523 (a)(15) has also been amended to eliminate the balancing test. More importantly, state courts now have concurrent jurisdiction over both types of nondischargeability claims.

These amendments make it clear, at least in Chapter 7 and Chapter 11 cases filed after Oct. 17, 2005, that the distinction between 523(a)(5) and 523(a)(15) claims has largely disappeared. However, in Chapter 13 cases the distinction is still important. Under that Chapter, the debtor must certify that all 523(a)(5) claims have been paid in full at the conclusion of the plan before the debtor can get a discharge. However, the discharge under Chapter 13 is somewhat broader, so that nonsupport family claims, i.e., the 523(a)(15) claims, may be discharged.

The bottom line is that after BAPCPA family law practitioners will have to spend less time in bankruptcy court.

Stuart Gold is a Partner in the West Orange, NJ, office of Mandelbaum, Salsburg, Gold, Lazris & Discenza PC. He has substantial experience in bankruptcy and complex commercial litigation.

In April 2005, Congress passed, and President Bush signed, the most recent set of amendments to the Bankruptcy Code, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Most of the provisions of this amendatory act applied to bankruptcy cases filed after Oct. 17, 2005. BAPCPA made significant changes in the treatment of alimony, child support and other obligations arising out of the dissolution of the marital relationship. This article refers to these obligations collectively as “family law obligations.” Although many articles appeared in 2005 regarding the changes made by BAPCPA, it is worth revisiting these changes as they apply to the family law practitioner because the current economic downturn will lead to many more consumer bankruptcy filings in the remainder of 2008 and in 2009.

Discharge and the Fresh Start

The key issue for any individual debtor is the discharge of obligations that were owed as of the date of the petition. The entry of an order of discharge acts as a permanent injunction against any future enforcement proceedings and provides the debtor with a “fresh start.” 11 U.S.C. ' 524. An individual debtor in a Chapter 7 case receives a discharge 60 days after the first meeting of creditors, provided that no objection to discharge or dischargeability of particular debts is filed within that 60-day period. The discharge order is generated by the clerk automatically within a few days of the expiration of the 60-day period. An individual in a Chapter 13 case receives a discharge upon the completion of all payments due under a plan; this discharge usually takes three to five years from the date of confirmation. In a Chapter 11 case, rarely used by individual debtors, the debtor is discharged upon the entry of an order confirming the debtor's plan of reorganization.

The discharge applies to all debts of the debtor, with the exception of debts that are characterized as nondischargeable by 11 U.S.C. ' 523. The two important categories of nondischargeable debt for the family law practitioner are obligations in the nature of support, such as alimony and child support, 11 U.S.C. ' 523(a)(5), and those family law obligations that are not support, 11 U.S.C. ' 523(a)(15). The latter provision was added in 1994 in order to exclude from discharge nonsupport items, such as indemnification agreements contained in property settlement agreements. The question of whether an obligation is in the nature of support for purposes of 11 U.S.C. ' 523(a)(5) is a question of federal law, not state law, and is inherently fact specific. The net effect of these exceptions from discharge, particularly after BAPCPA, has been to exempt most family law obligations from discharge.

The concept of discharge of debt must be distinguished from the concept of priority, although there is some interplay between the two. Dischargeability involves a determination of whether the debtor will continue to be responsible for the obligation after the completion of the bankruptcy. Priority determines a creditor's ranking in the pecking order of those who get paid from a debtor's bankruptcy estate. Prior to BAPCPA, support obligations such as alimony and child support, but not other family law obligations, received an eighth level administrative priority, which meant that such obligations were paid ahead of unsecured creditors but not much else. Under BAPCPA, support obligations receive a first level administrative priority, subject to a minor carve-out for the trustee's administration of assets used to pay this obligation. The treatment of support obligations as an administration expense is very important in Chapter 13 and Chapter 11 cases, as the plans must provide for payment of administration expenses in full. The administration priority is of less value in a Chapter 7 case, unless there are assets available for distribution to creditors. Thus, in a Chapter 7 case, the issue of nondischargeability is critical because it allows the nondebtor former spouse to pursue the debtor after discharge. In that situation, the debtor spouse should have more available resources after discharge as his other creditors may be enjoined from collecting prepetition debts.

Obligations for Cases Filed Before the Effective Date of BACPA

Under the prior form of 11 U.S.C. ' 523(a)(5), obligations for alimony, maintenance and child support pursuant to a separation agreement, divorce decree or other court order were not dischargeable, provided that such obligations were in fact alimony, maintenance or support and had not been assigned to a governmental unit. The bankruptcy court and the state court had concurrent jurisdiction over the issue of nondischargeability. There was no time limit for seeking a determination of nondischargeability. Thus, the nondebtor spouse could seek a determination of dischargeability in state court long after the debtor spouse had otherwise been discharged in bankruptcy.

Under former 11 U.S.C. ' 523(a)(15), all other obligations incurred in the course of a divorce or separation could be nondischargeable, unless the debtor did not have the ability to pay the obligation, or the benefit of discharging the obligation outweighed the detriment to the nondebtor spouse or child. The bankruptcy court had exclusive jurisdiction of nondischargeability actions under this section. Moreover, the objecting spouse had to file the nondischargeability adversary proceeding within sixty days of the first meeting of creditors. As a practical matter, the nondebtor spouse would also join the 523(a)(5) claim as well in order to avoid joinder issues.

Discharge Under BAPCPA

The BAPCPA amendments made it easier for the nondebtor spouse to prevent the discharge of a family law action. 11 U.S.C. ' 523(a)(5) now simply provides that a debt for a domestic support obligation is not discharged. Domestic support obligation is defined in 11 U.S.C. ' 101(14) and includes any obligation in the nature of alimony, maintenance or support, without regard to whether the debt is expressly characterized as such. 11 U.S.C. ' 523 (a)(15) has also been amended to eliminate the balancing test. More importantly, state courts now have concurrent jurisdiction over both types of nondischargeability claims.

These amendments make it clear, at least in Chapter 7 and Chapter 11 cases filed after Oct. 17, 2005, that the distinction between 523(a)(5) and 523(a)(15) claims has largely disappeared. However, in Chapter 13 cases the distinction is still important. Under that Chapter, the debtor must certify that all 523(a)(5) claims have been paid in full at the conclusion of the plan before the debtor can get a discharge. However, the discharge under Chapter 13 is somewhat broader, so that nonsupport family claims, i.e., the 523(a)(15) claims, may be discharged.

The bottom line is that after BAPCPA family law practitioners will have to spend less time in bankruptcy court.

Stuart Gold is a Partner in the West Orange, NJ, office of Mandelbaum, Salsburg, Gold, Lazris & Discenza PC. He has substantial experience in bankruptcy and complex commercial litigation.