Ex-spouses and divorced parents have long tried creative solutions to avoid spousal and child support payments. In one instance, a father offered to give up all parental rights and make a lump sum payment for child support in hopes of avoiding larger payments as his income increased. Even lottery winners have been known to sell a winning ticket for cash at a discount to avoid alimony. And it doesn’t stop there. One former NFL player began paying spousal support only after he was forced to spend several days in jail for avoiding paying his former spouse.
After the breakup of a marriage, it is not uncommon for people to find their financial situation has changed dramatically with new expenses and obligations piling up. Divorce leads to unexpected legal expenses, changes in living arrangements, and costs associated with the division of marital property. According to Forbes, the average contested divorce costs between $15,000 and $30,000, with some being far more expensive.
Clients who are making spousal or child support payments often feel as though the payments are unduly burdensome and are otherwise unhappy with the terms of their divorce decree. It is no surprise then, many of these individuals turn to bankruptcy for relief. This is where family law and bankruptcy meet. One of the questions commonly received by bankruptcy attorneys is whether a client, in these circumstances, can discharge his or her spousal and child support obligations through bankruptcy. Unfortunately for these clients, in most cases, the answer is “no.”
Personal bankruptcy through Chapter 7 or Chapter 13 of the Bankruptcy Code can be a very effective way of shedding debt and allowing a client to move forward with a fresh start. Our legal system has evolved from an earlier time in American history when people who could not pay their debts were sent to prison. And while the lay person often thinks of bankruptcy as providing a clean slate, some types of debt, including alimony and spousal support, cannot be wiped away or restructured in bankruptcy.
Broadly speaking, there are two types of debt when it comes to bankruptcy. The first is the dischargeable kind, which includes credit card debt, mortgage debt, medical bills, and utility bills. The second is the nondischargeable type, which, along with domestic support obligations like alimony and child support, also includes most taxes and often student loans. Because of the overriding public policy favoring the enforcement of familial obligations, bankruptcy law leaves little discretion to the courts when it comes to the dischargeability of domestic support obligations.
The reasoning for this hard line on domestic support obligations like alimony and child support is twofold. First, bankruptcy is a matter for the federal courts and matters involving marriage, divorce, and child support are governed by the state courts. Second, Congress has deemed child and spousal support to be too important to be dischargeable. As the Ninth Circuit has explained, “Bankruptcy provides a way to leave one’s debts, but not one’s most fundamental family obligations, behind.” In re Rivera, 832 F.3d 1103, 1106 (9th Cir. 2016).
Balancing the competing policies of allowing the honest, but unfortunate debtor a fresh start, and the public policy favoring the enforcement of familial obligations, Congress enacted the following two exceptions to the discharge provided to individual debtors under Chapter 7 and 13 of the Bankruptcy Code. The first is set forth in 11 U.S.C. § 523(a)(5), which states that “domestic support obligations” cannot be discharged in bankruptcy. Courts have constantly held that the term domestic support obligations includes child support and alimony, but have extended it to include other obligations upon which family members and former family members rely. The second is set forth in 11 U.S.C. § 523(a)(15), which provides that a debt to a “spouse, former spouse, or child of the debtor” incurred by the debtor in the course of a divorce or separation is not dischargeable in bankruptcy. The critical issues here are the identity of the payee and whether under state law, the debt was incurred in the course of a divorce or separation.
While the language of 11 U.S.C. § 523(a)(5) and (15) are fairly broad, they are not without limitation. For instance, courts have held that obligations to third-parties, even if set forth in the divorce decree, may be discharged because the debts are owed to a third-party and not the spouse, former spouse, or child of the debtor. Similarly, property settlement payments may be dischargeable when they are merely affecting an equitable division of community property and not providing domestic support.
And divorcing spouses should beware that simply labeling a payment as spousal support or alimony in a divorce decree does not necessarily make it nondischargeable in bankruptcy. Rather, the bankruptcy court will look to whether the payment obligation is really for the support of the former spouse or child or was incurred in the course of the divorce or separation irrespective of what the payment is labeled in the divorce decree.
Thus, while spousal support payments and other payment obligations incurred in a divorce proceeding are usually not dischargeable in a bankruptcy – no matter how creative one gets – the best practice is to consult with a bankruptcy attorney before filing to make sure that the client doesn’t just end up back in family court.
Nedda Ghandi, Esq., is the founding partner of Ghandi Deeter Blackham Law Offices. A Nevada native, Ghandi is a graduate of the University of Nevada, Las Vegas William S. Boyd School of Law and has practiced law in Las Vegas for 9 years. Ghandi has written numerous articles for publications concerning interesting developments in the law, and has been selected as a member of Nevada’s Legal Elite and as a Super Lawyer every year since 2013. Ghandi Deeter Blackham specializes in family law, bankruptcy, guardianship, and probate. Consultations may be scheduled by calling 702.878.1115 or visiting www.ghandilaw.com.
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