Often times when a married couple decides they need to file for divorce, there is a lot of debt incurred during their marriage. In order to facilitate the divorce in the separation agreement, the couple agrees to split their debt in some allocation, which applies some of the debt to a spouse, who subsequently decides to file bankruptcy. The question I as a bankruptcy attorney often hear is, “can I discharge my ex’s debts incurred in my divorce, that I now have to pay?” Unfortunately, the answer to this varies based upon the situation.
Most unsecured debts a person incurs are dischargeable in bankruptcy. However, Section 523 of the Bankruptcy Code lists certain debts deemed non-dischargeable. It should be noted that child support or alimony which collectively is referred to by the bankruptcy courts as “domestic support obligations” cannot be eliminated in any bankruptcy proceedings.
A second type of debt incurred in a divorce is credit card debt or other unsecured debt that the married couple agree to split in a contract approved by the Family and Probate Court called a Separation Agreement. As a matter of law it should be noted that a debt in support of a property settlement is not binding on the bankruptcy court in determining dischargeability, and a court can look behind such language to determine the real nature of the debt. In re Johnson, 445 BR 50 (Bankr. Court, D. Massachusetts 2011) citing, In re Golio, 393 B.R. 56 (Bankr.E.D.N.Y.2008). More specifically, the Bankruptcy Court for the District of Massachusetts can rule that any financial obligation agreed to in a separation agreement relative to credit cards and other debts are not a domestic support obligations and is can be discharged.
If a debt owed is not for support, 11 USC § 523(a)(15) sets out the test to determine if it might still be nondischargeable in bankruptcy. More specifically, the debt can be discharged if the person filing bankruptcy does not have the ability to pay such debt from income or property … not reasonably necessary to be expended for the maintenance or support of the person filing for bankruptcy or their children, or … if discharging such debt would result in a benefit to the person filing bankruptcy that outweighs the detrimental consequences to a former spouse. In plain simple English, in deciding of debts incurred during the marriage can be discharged, the Bankruptcy Court will analyze the respective financial situation of the ex-spouses at the time of they entered into the separation agreement or the Family Court entered an order.
Separate from simply owing a debt to a third party, such as American Express, in many divorce decrees, there is language that protects the former spouse from debt relief. This clause is called a hold harmless provision. A hold harmless obligation creates a new liability, independent of the preexisting liability to the collections agency that protects the other spouse safe from the third party creditor. Higgins v. Harn, No. 07-81072, 2008 Bankr. Lexis 100, at *9 (Bankr. C.D. Ill. Jan. 10, 2008). If the underlying debt is for support, such as a medical expense, then it may be deemed a domestic support obligation and cannot be avoided with a bankruptcy. However, if the hold harmless provision relates to a credit card debt, then it may be dischargeable only in Chapter 13 reorganizations, where the spouse can file a proof of claim, but not dischargeable in a Chapter 7 case, and will be deemed a priority debt.
A final type of debt that often is incurred in a divorce case, is through an agreement or by a court order to pay for the former spouse’s attorney fees. Macy v. Macy, 114 F.3d 1 (1st. Cir. 1997); Mellor v. Mellor, 340 B.R. 419, 421(Bankr. M.D. Fla. 2006). See also Nelson, Keys & Keys v. Hudson, No. 06-81745, 2007 Bankr. Lexis 3943, at *3 (Bankr. C.D. Ill. Nov. 27, 2007) ( an awards of attorney’s fees for services in obtaining support orders are held nondischargeable notwithstanding a provision for direct payment to the attorney so long as the payment is for the benefit of the Debtor’s former spouse or child. However, it should be noted that attorney’s fees owed to the lawyer representing the person filing bankruptcy is typically deemed an unsecured debt and can be eliminated through any chapter of bankruptcy.
The bottom line is that if you are in the process of filing for a divorce and are facing a great deal of financial hardship, you may want to consult with an experienced bankruptcy lawyer to both protect your rights with respect to a possible bankruptcy filing of your former spouse, and to determine if you can discharge your own financial obligations.