One of the biggest reasons that people end up in bankruptcy is because of divorce. As was analyzed in Chapter 2 of The Debt Trap: How Your Life Choices Impact on Your Financial Future, choosing the wrong partner is one of the major reasons people file for bankruptcy.
Instead of supporting one household, you now have two households to support. In addition, if you are paying alimony or child support, it can set you back for years. Child support or alimony can also never be discharged in a bankruptcy.
In addition, the bankruptcy code has eliminated a lot of loopholes for parties who owe money from a property settlement agreement.
11 USC 523 (a) (15) provides the following:
(a) a discharge under section 727,1141,1228 (a) or 1328 (b) of this title does not discharge an individual debtor from any debt-
(15) to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record or, a determination made in accordance with State or territorial law by a governmental unit;
Thus, if you file chapter 7, the debts owed from the property settlement agreement cannot be discharged.
The one loophole is still chapter 13 since equitable distribution is dischargeable under 11 USC 1328 (a). However, there are so many complicated issues regarding whether an obligation is support or equitable distribution so the chapter 13 will still be a challenging case.
Mr. Taieb recently helped a 50 year old man from Medford, NJ dealing with personal loans to in-laws where they alleged it was a domestic support obligation. The case finally settled after 8 months since there were complex issues whether it was support or equitable distribution.
Each case is very fact sensitive. However, if you have issues with equitable distribution, it would be much better, if feasible, to file chapter 13; a chapter 7 will make all obligations from a divorce non-dischargeable.
Steven N. Taieb, Esq. has been a South Jersey Bankruptcy Attorney for over 34 years and is board certified in consumer bankruptcy law by The American Board of Certification which is accredited by The American Bar Association.