THE EFFECTS OF A CHAPTER 13 BANKRUPTCY
IN A DOMESTIC MATTER
Prior to 1994, the only exception to discharge in a bankruptcy proceeding that affected a prior divorce was 11 U.S.C. § 523(a)5, spousal support. This resulted in a great deal of litigation as to what is spousal support. The Bankruptcy Courts accepted as "spousal support" the traditional periodic payments (as would the Internal Revenue Code), child support, attorney fees, and guardian ad litem fees.
However, through the litigation process, the Bankruptcy Court expanded the traditional notion of spousal support. Debts that an ex-husband was ordered to pay arguably became spousal support. These payments were necessary for ex-wife to maintain herself. The Bankruptcy Courts looked to the language utilized by the Court or by the parties in their separation agreements, the earnings of the parties, and other factors.
In 1994, the Bankruptcy Act was amended and 11 U.S.C. § 523(a)15 was added. That section exempted from discharge any debt to a spouse, former spouse, or child of the debtor 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.
The litigation ceased; however, this amendment only affected Chapter 7 proceedings. No similar exception is found in a Chapter 13. A Chapter 13 is commonly referred to as a consumer receivership. The applicable Bankruptcy Code sections are 11 U.S.C. §§ 1328, 1322(b)(5) and paragraphs (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of Section 523(a). Congress included the old (a)(5) spousal and child support provision, but completely neglected the issue of assumption of debts as found in Section 523(a)(15).
Consequently with the state of the economy, the litigation has begun anew in Chapter 13 proceedings. Again we are litigating the debts assumed by the debtor are a form of spousal support. This argument that an assumption of a debt is spousal support will fail if the non-debtor ex-spouse earns more or similar income as the debtor.
Where the spousal support argument does not appear viable, there may be other options. Though not fully litigated as of this writing, §523(a)(2)(A) false pretenses, a false representation, or actual fraud, and §523(a)(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny may provide another avenue to protect the ex-spouse. These, however, are very fact-dependent.
With the current economic conditions, the one thing we are sure of is that this will be an increasing area of attention. The fact that §523(a)(15) debts can be discharged in a Chapter 13 receivership will increase the use of this form of bankruptcy over a Chapter 7. Life just gets more complex.