When a couple goes through a divorce, one spouse can ask the court to order monetary payments to the individual that will be put in a weaker economic situation once it is finalized. These payments, known as spousal support or alimony, are meant to give that person the time and resources to find more solid financial grounding. Once the spouse is financially independent, it typically terminates, although there are exceptions to the rule under the right circumstances.
But what if one of the spouses file bankruptcy, particularly the one who is charged with paying alimony? Will it affect their spousal support payments? Here is a short guide to how bankruptcy affects alimony, and what a spouse can do to protect themselves should they face this situation.
Bankruptcy is the legal process that someone goes through when they are unable to pay their outstanding debts. This process is handled in federal court (as opposed to state court) and the rules are dictated by the U.S. Bankruptcy code. The purpose of filing for bankruptcy is that is allows the debtor protection from some creditors, while at the same time setting up a payment schedule to pay off a portion of the debt.
Individuals usually file for these protections under one of two chapters, either Chapter 7 or Chapter 13. Chapter 7 allows the person to pay some of their debts and discharge the rest. In comparison, Chapter 13 allows the individual to structure a payment plan and keep more of their assets.
No. While many of the person’s debts can be discharged through the bankruptcy process, spousal support is not one of them. The Bankruptcy Code specifically states that certain obligations like child support, student loans, and tax debt cannot be discharged. Spousal support falls into this category.
The court may change the amount of support that a spouse will pay during bankruptcy under two circumstances. One, if the debtor is going through a Chapter 13 bankruptcy, they can petition to lower their payments as a part of their repayment plan, which must be approved by the court. Two, if the receiving spouse for some reason assigns their right to receive spousal support to a third party, such a money lender. If they do that, it ceases to be protected spousal support under the Code, and is thus then dischargeable.
Bankruptcy, of course, affects the supporting spouse’s ability to pay spousal support at all. If someone is going through this process while also dealing with a divorce, their status will certainly be a major factor in determining how much the judge is going to order them to pay.
If the supporting spouse files for bankruptcy, there are steps that the receiving spouse can take to protect their rights. The best way to do is to take steps to declare themselves a creditor in the other spouse’s bankruptcy case. They can do this one of three ways:
- Notice: The receiving spouse may file a written notice of appearance with the court handling the supporting spouse’s bankruptcy case;
- Proof of Claim: The receiving spouse may file a proof of claim during the asset portion of the bankruptcy case, which is the stage where funds are distributed to creditors; and
- Automatic Addition: In some cases, the supporting spouse adds the receiving spouse as a creditor in their bankruptcy petition, so the receiving spouse does not need to take steps to add themselves.
Once the receiving spouse is officially recognized as a creditor, they will be able to take part in the creditor’s meeting. A trustee appointed by the bankruptcy court meets with all of the supporting spouse’s creditors to discuss payment terms and/or payment schedules. Remember, spousal support debt may NOT be discharged, so getting a seat at the creditor’s table is the best way to make sure your rights are protected.
Yes. Both areas of the law can be incredibly complicated by themselves, and together the complexity only multiplies. If you or a former spouse is planning to file (or already has filed) for bankruptcy, you will need an attorney that specializes in that field to guide you through the process and make sure all your rights under the law are recognized.
If you are dealing with bankruptcy issues and have yet to file for divorce, an experienced family law attorney will help you get the process started. It is easy to get overwhelmed when dealing with either bankruptcy or spousal support issues. Consulting a professional will help you deal with an incredibly intense situation.