Divorce Decree Award
One of the principal bankruptcy issues in a divorce case is whether an award in a divorce decree is characterized as alimony or support of the non-debtor spouse or a property award. When a debtor petitions for bankruptcy relief, all debts owed to a spouse or former spouse that are not domestic support obligations (alimony or child support) are not discharged by bankruptcy, and the obligations survive bankruptcy.
Court Tries to Balance
Additionally, the divorce court is free to do what is fair in the divorce proceeding by balancing things out. For example, if a debtor discharged his or her obligation relating to $100,000 of marital debt, thus obligating the other spouse exclusively to pay those obligations, the divorce court could award more property, alimony, or take other balancing measures to the non-debtor spouse so that both parties had the same amount of debt and/or property.
Support Obligation Or Property Settlement
Whether a debt is considered to be a support obligation, or is considered to be a property settlement is a question of federal law. Generally, federal courts liberally interpret a divorce decree award to be a non-dischargeable support obligation. However, labels are not necessarily binding, and simply calling something a property award may not be a winning argument. A bankruptcy court will consider the facts of each case.
For example, if the debtor promised to pay the parties’ son’s educational loan for college, and the obligation is labeled as child support in the decree, the intent of the parties to characterize this debt as support would be clear, and the bankruptcy court could easily designate this debt as not dischargeable. Other facts may not be so clear.
A debtor who petitions for bankruptcy relief under Chapter 13 (a monthly payment plan to pay debtors from 3-5 years), must pay his support obligations or his bankruptcy case will be discharged.
Bankruptcy Petition Not Automatic Stay
Generally, the filing of a bankruptcy petition by a party in a divorce case does not act as an automatic stay of the divorce proceeding as it applies to non-property issues. Therefore, the divorce court is free to make rulings pertaining to child custody, alimony, and child support without either party having to petition the bankruptcy court for permission to make such rulings.
There are many other provisions associated with bankruptcy which relate to a divorce case.