Bankruptcy Attorneys Examine Alimony and Child Support Obligations in NY

It is an unfortunate fact that many marital disputes result in one party (or both) seeking bankruptcy relief, often without an adequate understanding of the limited relief available in the bankruptcy forum. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) directly addressed issues related to the Dischargeability of Marital Debt and Support Obligations, as well as to the effect of the Automatic Stay on marital-related collection and enforcement proceedings.

Domestic Support Obligations

A “Domestic Support Obligation” is any debt incurred before or after a bankruptcy filing that is:

• owed to or recoverable by a spouse, former spouse, child or governmental unit,
• in the nature of alimony, maintenance or support, and
• established pursuant to the terms of a divorce decree, separation agreement, property settlement agreement, court order or administrative determination.

In Chapter 7, essentially all marital and domestic relations obligations are not dischargeable, regardless of whether they are support in nature, property divisions or “hold harmless” agreements, provided they were incurred by the debtor in the course of a matrimonial proceeding culminating in a separation agreement, divorce decree, court order or administrative determination.

A debtor’s obligation to pay marital debts directly to a third party ( i.e. pay the mortgage on former marital residence) and to hold the former spouse harmless on said debts will be non-dischargeable if the obligation has the effect of providing support to the former spouse. A debtor’s duty to pay the following expenses are usually deemed to be in the nature of support and not dischargeable:

• Education expenses of a minor child
• Provide medical coverage for a minor child
• Maintain life insurance, with the minor children as beneficiaries

Attorneys’ fees owed by debtor to his own lawyer are clearly dischargeable, but as a general rule, attorney’s fees owed by debtor to a former spouse’s attorney are not dischargeable if the underlying legal proceeding resulted in the entry or an alimony or support order in favor of the former spouse.

Qualified Domestic Relations Orders

The division of a debtor’s pension benefits frequently occurs in a divorce proceeding, resulting in the entry of a Qualified Domestic Relations Order (“QDRO”). Such a pension division is generally viewed as a transfer by debtor of a present interest in his pension, and as such is not a “debt” that can be discharged in bankruptcy.

In Chapter 13 past-due Domestic Support Obligations owed by a debtor are not dischargeable unless they are paid in full over the life of the Chapter 13 Plan. However, if a debt created by a matrimonial agreement or decree is not in the nature of support, it sometimes can be discharged in Chapter 13 without being paid in full. This would probably not occur too often, and might include a debtor’s duty to transfer an item of negligible value (i.e. a family heirloom), or a luxury item such as a snowmobile.

Confirming a Chapter 13 Plan

For a Chapter 13 Plan to be confirmed by the Bankruptcy Court:

• It must pay in full to the former spouse all Domestic Support Obligations owed by debtor at the time of the bankruptcy filing, and
• The debtor must be current on all Domestic Support Obligations incurred after the bankruptcy filing.

A Chapter 13 Plan, even if confirmed by the Bankruptcy Court, is subject to dismissal if the debtor fails to pay any post-petition or post-confirmation Domestic Support Obligations, and a Chapter 13 Discharge will not be entered by the Bankruptcy Court unless and until a debtor certifies that all Domestic Support Obligations have been paid and that the debtor is current on such obligations.

The Automatic Stay created by a bankruptcy filing bars the commencement or continuation of most legal proceedings, but it has no effect on a proceeding for:

• The establishment of paternity,
• The establishment or modification of an order for a Domestic Support Obligation such as child support,
• The determination of child custody or visitation issues, or
• The dissolution of marriage, except to the extent that such proceeding may seek to determine a division of marital property in which the bankruptcy estate also has an interest. In this instance, the divorce can be granted without first obtaining relief from the Automatic Stay, but the marital property cannot be divided without obtaining such relief.

The Automatic Stay also does not prevent the post-petition collection of Domestic Support Obligations such as alimony or child support:

• From any property belonging to the debtor, providing that the bankruptcy estate does not also have an interest in said property,
• From automatic wage deduction orders created by a statute or judicial or administrative order,
• From the interception of debtor’s federal or state income tax refunds, or
• From the withholding, suspension or restriction of a debtor’s driver’s license or professional or occupational license.

In summary, Bankruptcy Court is by no means a safe harbor for someone seeking refuge from the obligations imposed by a Domestic Support Obligation.

Contact Hayward, Parker & O’Leary today

For dedicated legal guidance related to marital debt and domestic support, contact Hayward, Parker & O’Leary today. Their office is conveniently located in Middletown, NY.