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When Divorce Turns into Bankruptcy: Which Debts Are Dischargeable?

Today, more than ever, a divorcing couple must consider how will their settlement agreement or court order be effected if one of the parties files for bankruptcy. A few years ago only child support and alimony obligations were non-dischargeable in bankruptcy, i.e., were still owed after the bankruptcy. Section 523(a)(5) of the Bankruptcy Code required bankruptcy courts to divide family law monetary obligations into two parts non-dischargeable payments of alimony, maintenance or support and dischargeable property settlement obligations. Thus, while the paying spouse's obligation to pay child support and alimony are not dischargeable, their obligation to pay a monetary award is.

In an effort to reduce the inequi-ties that resulted from the alimony/property settlement distinction, Congress enacted Section 523(a)(15)of the Bankruptcy Code to make nondischargeable those ob-ligations arising out of a divorce decree or separation agreement that are not alimony, maintenance or support, but that, for public policy reasons, should not be discharged. As the legislative history to Sec-tion 523(a)(15) indicates, this subsection will make those obligations nondischargeable in cases where the debtor has the ability to pay them and the detriment to the nondebtor spouse from their nonpayment outweighs the benefit to the debtor of discharging such debts.

According to Section 523(a)(15), the first test that a court must apply to determine whether the receiving spouse's monetary award is dischargeable is whether the debtor, has the ability to pay the debt. To do so, the court will apply the "disposable income test," which means income received by the debtor spouse that is not reasonably necessary to be expended (a) for the maintenance or support of the debtor or a dependent of the debtor; and (b) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.

If the court determines that the paying spouse does not have the ability to pay the monetary award, the examination ends there and the debt is dischargeable. If, on the other hand, the court determines that the debtor spouse has the ability to pay the monetary award, the court must then decide whether the discharge of the monetary award outweighs the detrimental consequences to the nondebtor spouse of non-payment. While conducting such analysis, a court should keep in mind that the "benefits of the debtor's discharge should be sacrificed only if there would be substantial detriment to the nondebtor spouse that outweighs the debtor's need for a fresh start." In performing such analysis, the court may consider the following factors:

  • Changes in the financial condition of the parties from the time of the divorce or separation to the filing of the bankruptcy petition;
  • The relative income and worth of the parties and their respective spouses;
  • A comparison of the parties' post-bankruptcy obligations;
  • The amount and nature of the debt involved, and whether the nondebtor spouse is jointly liable on the debt;
  • The health, job skills, training, age and education of the parties and their respective spouses;
  • The number of dependents of the parties and their respective spouses, their ages and any special needs that they might have; and
  • Whether the nondebtor spouse is eligible for relief under the Bankruptcy Code.

If after performing this analysis, the court determines that it is more harmful to the nondebtor spouse to discharge the monetary award than to the debtor spouse in not discharging it, the monetary award will not be dischargeable.

For more information on this article, contact Lynn A. Kohen at 410/752-9748.

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