At the center of most divorces is the division of assets, debts and income. Sometimes these matters are purely dealt with by agreement by the parties and sometimes they are dealt with by Courts. Despite having an agreement or a Court order on the matter though, the matter may not be final if one of the spouses subsequently files a Chapter 13 divorce.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) introduced a new definition to the Bankruptcy Code under § 101(4A): the Domestic Support Obligation, which is:
a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is —
- (A) owed to or recoverable by — (i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or (ii) a governmental unit;
- (B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;
- (C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of — (i) a separation agreement, divorce decree, or property settlement agreement; (ii) an order of a court of record; or (iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and
- (D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.
Determining whether a debt is, in fact, a Domestic Support Obligation, as opposed to an obligation arising from a property division or settlement, determines the obligation’s dischargeability in a Chapter 13 bankruptcy. From the creditor’s perspective, the holder of a Domestic Support Obligation claim has special protections under the code, including:
- If an obligation is deemed a Domestic Support Obligation, then it is considered a priority claim under § 507(a)(1)(A) and entitled to full payment under the debtor’s Chapter 13 plan pursuant to § 1322(a)(2) unless the claimant agrees to different treatment.
- The debtor has incentive to remain current in any post-petition Domestic Support Obligation payments because under § 1325(a)(8), the debtor’s plan may not be confirmed if he or she is in default.
- Per Section 1307(a)(11), during the case, the nonfiling spouse may seek the dismissal or conversion of the debtor’s Chapter 13 if the debtor fails to pay any post petition Domestic Support Obligation as it comes due.
- The Chapter 13 discharge will not be granted to a debtor until the Domestic Support Obligation amounts due both before and after the bankruptcy filing have been paid in full pursuant to § 1328(a)(1).
Accordingly, it is very important that a divorce attorney draft a property settlement agreement that casts her spouse’s obligations as Domestic Support Obligations. With the exception of section B above, the definition of a Domestic Support Obligation is written very broadly to encompass most obligations that would typically arise from a domestic proceeding. Section B requires that the debt be “in the nature of alimony, maintenance, or support.” This is often unclear.
The majority of the requirements for defining a Domestic Support Obligation, that is, subsections A, C and D of § 101(4A), turn on objective criteria, such as the identity of the payee, the type of instrument establishing the obligation, and whether the obligation has been assigned. The more difficult determination is often whether the obligation meets the requirements of subsection B — that it be “in the nature of alimony, maintenance, or support.” The intent of the parties controls, but determining that intent in hindsight and from prior orders or agreements is not always easy.
In the Fourth Circuit, courts look at the intent of the parties to create a support obligation. When construing property settlement agreements, courts determine whether the parties intended the obligation as alimony, maintenance, or support at the time of the execution of the agreement. If the intent of the parties was that the obligation was merely a division of property, then the obligation is not a Domestic Support Obligation.
The Fourth Circuit has developed an “unofficial” test for the intent inquiry, which provides for the court to look at the following factors.
- Courts consider the actual language and substance of the agreement, being mindful of the context in which the obligation arises under the agreement. Labels, while suggestive, will not control. Courts also will consider factors such as whether the payment is to be made in a lump sum, more akin to property division, or over a period of time in order to provide support. Also, in interpreting whether the language of the agreement favors a property division or a Domestic Support Obligation, courts will look at factors such as any agreed tax treatment for the obligation, (a spouse who has taken the benefit of treatment of marital obligations as alimony may be estopped from later claiming the obligation was a property settlement and an oblige who did not report past payments as alimony income may be estopped from contending the obligation was alimony) whether the parties waived support, and how the agreement is organized.
- Courts may consider the parties’ financial situation at the time of the agreement. Relevant factors include the prior work experience, employment history, physical health, potential earning power, and business opportunities.
- Whether one spouse has custody of minor children from the marriage.
- Whether the agreement terminates on death or remarriage
- Whether or not the payments are designated for specific purposes, e.g. medical care, mortgage,
- Whether or not a receiving spouse is employed
So getting a large property settlement in return for reduced alimony may be a short lived victory if the former are discharged in bankruptcy shortly thereafter. Though a state court might find this to be a change in circumstances that permits modification of the alimony, this arguably violates the Bankruptcy Code’s “fresh start” policy.
