How You Can Use Bankruptcy to Discharge Divorce-based Debts | law office of richard kistnen

Often when reading a news story concerning bankruptcy, it’s framed as a debtor having hit “rock-bottom” in their finances, or some celebrity that didn’t know how much they were paying and to whom.  While that approach is true in some cases, bankruptcy relief can be a very good strategic tool for many people.  In light of the housing crisis of the last few years, using bankruptcy as a tool to restructure mortgages has been very effective, notably stripping off wholly unsecured liens on your residence.  In this article, I want to discuss how you can use bankruptcy to deal with a class of debt that can be very emotionally-charged, and that is debt arising from a divorce or separation.

In a chapter 7 case, debts arising “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” are excepted from discharge.  11 USC 523(a)(15).  As an example, as part of a divorce settlement agreement that is incorporated into a divorce judgment, you agree to pay to your now ex-spouse a total of $50,000.00, payable over three years in equal monthly installments.  If you proceed to file for chapter 7 bankruptcy, that debt is nondishargeable, and your ex-spouse can still attempt to enforce and collect after you come out of your bankruptcy.

The discharge obtained in a chapter 13 case, however, is a bit broader than the discharge obtained in a chapter 7 case.  A discharge obtained in a chapter 13 case actually discharges an unsecured claim that arises as part of a divorce or separation agreement.  (11 USC 1328(a)(2) excepts from a chapter 13 discharge debts “of the kind specified in section 507(a)(8)(C) or in paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of section 523(a).  The statute specifically excludes section 523(a)(15), described above.)

How may this work for you?  Let’s assume, again, that as part of a divorce agreement incorporated into a divorce judgment, you are scheduled to pay your now ex-spouse the same $50,000.00, payable over three years in equal monthly installments.  If you qualify for a chapter 13 bankruptcy, that $50,000.00 debt to your ex-spouse is treated as any other general unsecured claim.  If your confirmed plan will be paying 5% to all general unsecured creditors, your ex-spouse will only be receiving $2,500.00.  The balance ($47,500.00) will be discharged.

Understanding the power of bankruptcy relief, and how to navigate it, can help you obtain incredible results like this.  If you would like to discuss bankruptcy relief for you, don’t hesitate.  Contact LORK to get started.

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