Alimony and child support are clearly written in the bankruptcy code as non-dischargeable. If your ex-spouse files, he or she cannot get rid of the obligation! But did you know that certain support can be wiped out if it isn't worded properly in your divorce decree?
Wording and Descriptions Count!
The bankruptcy code renders non-dischargeable "a domestic support obligation." But why doesn't it just say "alimony and child support"? Good question! The answer is that many obligations in a divorce decree can be for support other than those two things, so they need to be protected. But in order to do so, there must be some careful wording in the divorce decree to protect it.
As far back as 1990, the Third Circuit Federal Court (our circuit here in NJ) has set out the definition of a Domestic Support Obligation (DSO) for the purpose of determining dischargeability in a bankruptcy. In its opinion, the court stated that a judge "must look beyond the label attached to an obligation by a settlement agreement to examine its true nature."
What Needs to Be in the Paperwork?
What does this mean? It means that the attorneys that draft the order need to do more than call a particular obligation "in the nature (or purpose of) support." The bankruptcy judge is going to look beyond that to ascertain the intent of the parties. This is done through a three-part test that examines:
- the language and substance of the agreement in the context of surrounding circumstances, using extrinsic evidence if necessary
- the parties' financial circumstances at the time of the settlement
- the function served by the obligation at the time of the divorce or settlement. An obligation that serves to maintain daily necessities such as food, housing and transportation is indicative of a debt intended to be in the nature of support
Thus, in drafting these documents, you need to provide language and specifics in the order that address these three factors.
But are there some examples of this? Certainly! These issues have been fought many times, so there are some specifics we can look at.
- Mortgage Obligations. In one case, an ex-husband was found to be responsible for payments on a second mortgage for the ex-wife's home where she lived with the two children and could not afford to keep the home if he did not make the payment. In another case, an ex-husband was required to provide her with the residence and its equity free and clear of a line of credit mortgage, so payments on said loan were considered support. On the other hand, in another case, due to shared parenting and a waiver of alimony and child support, the maintenance of the marital home for the benefit of the children was not needed, so the mortgage payments were not in the nature of support.
- Condo Fees. In 2011, an ex-spouse made a claim in a debtor spouse's chapter 13 that the divorce decree required them to share marital debt, including condo dues, until such time as the home was sold. The court found that the creditor spouse had not provided sufficient proofs of her financial condition and needs at the time the condo fee obligation arose. The court might have ruled differently if there was evidence of this, particularly in the divorce decree.
- Retirement Funds. Where retirement funds were the subject of a Qualified Domestic Relations Order (QDRO) to apportion them between the parties, even where the funds had not been apportioned yet, the bankruptcy court imposed a constructive trust on those funds in favor of the creditor spouse, stating that they were not the debtor's property in the bankruptcy.
- Health Insurance. In a 2015 case, a debtor was current on his alimony, but was behind on health insurance premiums he was to pay on his ex-wife's behalf. The court found this to be in the nature of support, relying on language in the property settlement agreement that stated that "major medical insurance is a prime consideration of the parties, especially for the benefit of the Wife."
- Legal Fees. Luckily, this is a well-settled issue in bankruptcy law. When a party is awarded attorney's fees in a divorce, those fees are in the nature of support. This is not the case, however, for fees incurred by the debtor.
- Obligations from a Pre-Nuptual Agreement. The intent of the parties is always paramount, and a 2013 bankruptcy case proves this. A pre-nuptual agreement called for the wife to receive, in the event of divorce, $1,000 for every month of the marriage. The agreement itself stated that this money was neither in the nature of support or equitable distribution, which the debtor argued meant that the obligation was dischargeable. The bankruptcy court disagreed when the creditor spouse objected to discharge. It stated that despite the language in the agreement, it was clear from trial testimony that the payments were indeed in the nature of support!
The Type of Bankruptcy Matters
Be aware, though, that in a chapter 7, any obligation under equitable distribution is non-dischargeable, so this is not as critical in that context. But if your ex-spouse files a chapter 13 that tries to limit or eliminate a DSO by claiming it to be in the nature of equitable distribution, then you can have a problem if there is not sufficient wording in the order or the bankruptcy judge's inquiry does not turn up sufficient facts to support your position.
Need Help Fighting for Your Rights?
Is your ex-spouse trying to discharge a support obligation in a NJ bankruptcy? If you live in the Gloucester County, New Jersey, area, please feel free to call me at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your situation.
If you are looking for more information on how bankruptcy might affect your divorce, then you should download my free book, Top Questions Divorcing Couples Ask About NJ Bankruptcy.
If you have more questions about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.