Does Bankruptcy Erase Domestic Support Obligations?

EraseDebtWhat’s a Domestic Support Obligation?

A debt that is in the nature of alimony, maintenance or support of a spouse, former spouse or child of the debtor (now defined by the term “domestic support obligation” — often shortened to “DSO”) is not dischargeable in either a chapter 7 or chapter 13 bankruptcy case. See 11 U.S.C. §§ 523(a)(5); 1328(a)(2).

A debt owed to a spouse, former spouse or child of the debtor, that is not a DSO, but that is incurred “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” is nondischargeable in a chapter 7 case. See 11 U.S.C. § 523(a)(15).

What’s a Non-Domestic Support Obligation?

A non-DSO marital obligation encompassed by 11 U.S.C. § 523(a)(15) is dischargeable in a chapter 13 case. See 11 U.S.C. § 1328(a)(2) (incorporating by reference certain chapter 7 non-dischargeability provisions, but excluding § 523(a)(15).

The characterization of a debt as a DSO or a non-DSO marital obligation is a question of federal bankruptcy law. See In re Gianakas, 917 F.2d 759, 762 (3d Cir.1990). Generally speaking, when an obligation is derived from a marital settlement agreement entered into by the parties, determining whether the obligation is in the nature of alimony, maintenance or support, as distinguished from a property settlement, depends on the intent of the parties at the time of the settlement agreement.

Is the Domestic Support Obligation dischargeable?

Whether a domestic support obligation is in the nature of support so as to be non-dischargeable, as distinguished from property settlement, depends on the finding as to the intent of the parties at the time of the settlement agreement, which can best be found by examining three principal indicators:

  1. First, the court must examine the language and substance of the agreement in the context of surrounding circumstances, using extrinsic evidence if necessary;
  2. Because the language of the agreement alone may not provide a sufficiently conclusive answer as to the nature of an obligation, the second indicator is parties’ financial circumstances at the time of the settlement. The facts that one spouse had custody of minor children, was not employed, or was less employed in less remunerative position than the other spouse are aspects of the parties’ financial circumstances at the time the obligation was fixed which shed light on nature of obligation as support;
  3. Third, the court should examine function served by the obligation at the time of the divorce or settlement. An obligation that serves to maintain daily necessities such as food, housing and transportation is indicative of debt intended to be in the nature of support. Bankr.Code, 11 U.S.C.A. § 523(a)(5).

Guidelines that determine whether a marital obligation is in the nature of support

A leading bankruptcy treatise breaks out the three (3) Gianakas factors into a more expansive set of factors for a court to consider in distinguishing DSO’s from property division obligations:

  1. The labels in the agreement or court order;
  2. The income and needs of the parties at the time the obligation became fixed;
  3. The amount and outcome of property division;
  4. Whether the obligation terminates on obligee’s death or remarriage or on emancipation of children;
  5. Number and frequency of payments;
  6. Waiver of alimony or support rights in agreement;
  7. Availability of state court procedures to modify or enforce obligation through contempt remedy;
  8. Tax treatment of obligation.

4 Collier ¶ 523.11[6][a]–[h].

What happens if the court determines that the marital obligation is in the nature of support?

A DSO is granted priority status in a bankruptcy case. As such, it must be provided for in a debtor’s Chapter 13 plan. A debtor’s Chapter 13 plan “shall provide for full payment, in deferred cash payments, of all claims entitled to priority under the Bankruptcy Code.”

What happens if the court determines that the marital obligation is in the nature of a property settlement?

A determination that the marital obligation is in the nature of property settlement will result in the debt been treated as a general unsecured claim in the Chapter 13 plan. Most unsecured creditors are paid pennies on the dollar in a Chapter 13 case.