Separation Agreements that are incorporated into a divorce decree (and decrees of divorce themselves) pose difficult and sometimes unexpected results in bankruptcy. Many of the general rules of bankruptcy can be dramatically altered with a separation agreement or divorce decree. This article discusses a few of the problems that divorces and divorce decrees pose in a subsequent bankruptcy.
It is widely known that domestic support obligations, such as child support and alimony, are excepted from discharge under section 523(a)(5) of the bankruptcy code. (This means that the debtor will remain liable for the debt even after a discharge of other debts has been obtained.) Debts that are owed to a spouse are excepted from discharge under section 523(a)(15) as well. At first blush this seems to be straight forward and a narrow exception (unless the debt is owed to the spouse, it is discharged). This has a much greater reach than meets the eye, however.
Courts have interpreted this section 533(a)(15), however, to include pre-existing marital debts agreed to be paid by one spouse (debtor spouse) as part of a separation agreement or divorce decree. In re Wodark, 425 B.R. 834 (10th Cir. BAP 2010). This applies when the separation agreement is incorporated into an enforceable divorce decree. A divorce decree is a judgment and not just a contract. As a result, the non-debtor spouse may, inter alia, obtain a contempt order when the debtor spouse fails to pay. While the liability to creditor is discharged in a Utah chapter 7 bankruptcy, the spouse has the right to enforce the judgment (divorce decree).
The limitation of discharge of the debts owed to the spouse under § 523(a)(15) as discussed above, does not apply in a Utah chapter 13 bankruptcy, however. Section 1328(a)(2), also know as the super discharge provision that applies in chapter 13 cases discharges the debt owed to the spouse upon completion of the chapter 13 plan.
Therefore, if one of the primary debts sought to be discharged is debt owed under divorce decree, the debtor should file a chapter 13 petition rather than a chapter 7. While the difference between a chapter 7 and chapter 13 regarding former spouses may seem surprising, it is consistent with one of the primary objections of bankruptcy reform of 2005: to encourage more chapter 13 bankruptcies. Consultation with an experienced bankruptcy attorney is the best way to determine which chapter of bankruptcy is appropriate.