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Bankruptcy and Alimony: Supporting Spouse's Perspective
From the supporting spouse’s perspective, getting spousal support / alimony payments modified or discharged through bankruptcy can be a formidable task. Section 523(a)(5) of the Bankruptcy Code explicitly states that alimony debt and payments are nondischargeable. However, there are two exceptions.
The first is that alimony debt is dischargeable if it was legally “assigned” or transferred to another person by the supported spouse. The second exception is if the supported party chose to mischaracterize part of the divorce settlement as “alimony” in return for less of the property. A bankrupt spouse may choose to make these arguments in family court.
A bankruptcy may modify alimony payments when it significantly affects the economic positions of the parties. It may decrease alimony where the supported spouse’s property division debt is discharged in bankruptcy, which forces the supporting spouse to take on that debt.
Bankruptcy can affect the ability to pay. A major factor the court uses to set spousal support payments is the supporting spouse's ability to pay, taking into account their earning capacity, actual income / cash flow, assets, and standard of living. The issue courts will consider regarding the ability to pay is whether the supporting spouse’s budgeted expenses are reasonable and necessary. Courts will exclude luxury items, but will usually allow the supporting spouse to maintain her accustomed lifestyle.
Another way bankruptcy can modify spousal support payments is by showing a “detriment” considering all circumstances. The test is a balancing between the detriment of discharge / reduction to the supported spouse versus the supporting spouse’s right to a fresh start through bankruptcy. The bankrupt spouse will argue the latter.
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