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You are here: Home / Bankruptcy and Divorce / Practical Bankruptcy: The “Super Discharge” of Non-Support Divorce Debts

Practical Bankruptcy: The “Super Discharge” of Non-Support Divorce Debts

October 14, 2013 by Mikel Erdman

If your divorce decree obligates you to pay other than child or spousal support, Chapter 13’s “super discharge” may hugely help.

 

Non-Support Divorce Debt

Child and spousal support can never be discharged (legally written off) in bankruptcy, under either Chapter 7 or 13. On the other hand, financial obligations that are NOT “in the nature of support” CAN be discharged in a Chapter 13 “adjustment of debts” case, although not in a Chapter 13 one. This may be reason enough in the right situation to file a Chapter 13 case instead of a Chapter 7 one.

But what ARE non-support divorce debts? They are usually obligations in your divorce decree related to the division of property and the division of debts.

So if in your divorce your ex-spouse received a less valuable vehicle and you received a more valuable one, your divorce decree may have required you to pay your ex-spouse a certain amount of money to make up for the difference in these vehicle values.

Or your divorce decree may have required you to pay certain marital debts. Although your legal obligation to most creditors can be discharged in either a Chapter 7 or Chapter 13 case, you have a separate obligation to your ex-spouse arising out of the divorce decree to pay that debt.

To emphasize again, both of these divorce decree-based obligations—arising from the division of assets or of debts—cannot be discharged under Chapter 7, but can be under Chapter 13.

For Example

To illustrate, consider Karen, a self-employed residential realtor. Divorced four years ago with no children from the marriage, she received the couple’s condominium in the divorce. At the time it had equity of $80,000. So she was obligated in the divorce decree to pay half that amount, $40,000, to her ex-husband, through monthly payments of $500, with any remaining balance to be paid in full through proceeds of either a sale or refinancing of the home. At the time of the divorce Karen and her ex-husband had similar incomes and potential for future income, so no spousal support was awarded to either of them.

Because of a combination of the collapse of the residential housing market during the recession and some serious health issues, Karen’s income was significantly reduced during the years since the divorce. As a self-employed business owner, she just did not have enough income to pay her necessary personal and business expenses and also enough towards her income taxes. So she owes $20,000 in a number of years of recent IRS taxes that she cannot discharge. She also has $25,000 in medical debts, and another $25,000 in credit cards. With the slow improvement in the residential housing market, and a return to good health, Karen’s income has improved and somewhat stabilized, but she is behind on all her debts, including to her ex-husband. He has re-hired his divorce attorney who has filed a motion in divorce court to force Karen to pay what she owes him.

The Huge Benefit of the Chapter 13 Super Discharge

Following the advice of her bankruptcy attorney, Karen filed a Chapter 13 case. This immediately and permanently stopped the proceedings against her in divorce court.  Chapter 13 allowed her to pay her income taxes—her “priority” debts—while being protected from the IRS and while avoiding any additional interest and penalties. Also, Karen’s debt to her ex-husband was treated as a “general unsecured” debt, the same as her medical debts and credit cards. She was not obligated to pay these “general unsecured” debts except to the extent she could afford to do so AFTER paying off all of her “priority” income taxes.

Her Chapter 13 plan, proposing to pay $450 per month to all her creditors based on her budget, was approved by the bankruptcy judge. After making those payments consistently for about 4 and a half years, Karen had paid in enough to pay off her income taxes, as well as her Chapter 13 trustee’s administrative fees and Karen’s attorney’s fees. This left no money for her “general unsecured” creditors, including the obligation to her ex-husband. But having met all the requirements of Chapter 13, at that point all of her “general unsecured” debts were forever discharged and her case was closed.

By making monthly payments of less than what she had been obligated to pay just to her ex-husband, and for a much shorter time, Karen caught up on her income taxes and avoided paying anything on her “general unsecured” debts, including to her ex-husband on the $40,000 non-support divorce obligation.                 

Caution

Be aware that just because you may be able to discharge such non-support divorce debts through Chapter 13, you should get very good legal and practical legal counsel before attempting to do so. The example provided above is extremely straightforward—just about any real life situation, including your own—would be more complicated. So you absolutely need to get personal legal advice to find out what would happen in your situation in your local bankruptcy court. 

Filed Under: Bankruptcy and Divorce Tagged With: discharge,nondischargeable debts,marital debts,Chapter 13,Chapter 7 bankruptcy,child and spousal support

About Mikel Erdman

Mikel Erdman is the founder of MySMARTblog and RealtyBlogContent. He is a published author and speaking authority on topics including marketing automation and how technology can positively affect company and individual sales efforts.
If you like the idea of world-class content marketing in a completely automated system, Click Here for his valuable, limited time offer.

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