Are Financial Settlements in Divorce Proceedings Dischargeable in Bankruptcy?

Are Financial Settlements in Divorce Proceedings Dischargeable in Bankruptcy?

In today’s economy, litigants in divorce cases are just as likely to be fighting over shared debts as shared assets.  As a result, many divorcing parties smartly settle cases quickly, rather than driving themselves further into debt with additional attorney’s fees.  In fact, settling rather than litigating a case can be a wise financial decision for any individual or business, even outside the family law context.  This is not to say there is not a time and place for fight things out through litigation, but the economic standing of the litigating parties always influences settlement choices.

In addition to making strategic settlement decisions, many individuals facing financial difficulties also avail themselves of the protections from bankruptcy.  While there are pros and cons to bankruptcy, it can be an effective tool for individuals facing financial problems, depending of course on the individual facts and circumstances of the situation.

Having said that, individuals with obligations stemming from divorce proceedings are not always able to discharge such obligations.  For example, in the recent case of Hicks v. Azim the Roanoke City Circuit Court considered whether a husband’s obligations from the final divorce decree from his wife could be discharged in Chapter 7 bankruptcy.  His ex-wife argued that they were domestic support obligations, and thus non-dischargeable, whereas he argued that they were property settlements, and thus dischargeable and no longer payable following his bankruptcy.

In reviewing the matter, the Court held that the obligation (which totaled approximately $50,000 in spousal support; payment for a vehicle; payment of back taxes; and a lump sum payment) was not dischargeable in bankruptcy.  Rather, it was exempt from discharge as per 11 U.S.C. § 523(a)(5), or, alternatively, 11 U.S.C. § 523(a)(15).  The former statute exempts “domestic support obligations” from being discharged, whereas the latter exempts debts “to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) 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.”

The debt in question was both contained in the divorce decree and it also included spousal support as part of the overall debt.  As such, the Court held that the debt could not be discharged.

In light of the foregoing, parties in divorce should carefully consider whether or not they can honor the terms of a proposed final divorce settlement agreement.  Obligations in divorce decrees are likely to survive even the very broad protections of a bankruptcy.

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