What Happens to Child Support, Alimony when Ex Declares Bankruptcy?

According to the AP Former New Jersey Governor James McGreevey was quoted as saying: "I want to pay child support. I want to fulfill my obligations. Unfortunately, I have had to bankrupt myself to pay legal fees upon legal fees."  What if this happened to you?  What would you do?

 40 percent of individuals who file for bankruptcy do so as a direct result of divorce, medical crisis or unemployment, According to “The Fragile Middle Class: Americans in Debt,”
How a bankruptcy affects someone who is divorced depends a lot on the settlement agreement. A primary concern, for the spouse owed money, is what will happen to spousal support, child support and property settlements, said Mathew Weber, a CPA and forensic accountant. “The rules (for bankruptcy) are pretty straightforward,” he said, adding, “The cases are pretty complicated.”   

If your ex files for bankruptcy, all creditors -- including you if you're owned spousal or child support -- would receive notification from the court. Then you have to file a claim right away or " the court can discharge” the debt, Weber said. “People who are creditors in bankruptcy would be well advised to assume the worst about what the judge will decide,” said attorney and divorce mediator Lee Borden.

Thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), individuals who are owed child or spousal support are protected from losing those funds in court. According to Borden, the laws that served primarily as a bankers’ protection bill also helped with family law claims. “All family law claims are now called first priority. That means that they enjoy a priority when it comes time for the trustee to decide who gets paid and who doesn’t,” Borden said.   

Before the protection act, Borden said lawyers couldn’t prosecute the family law claims until the end of the automatic stay – a period where creditors left you alone. That, however, is no longer the case when it comes to child support and spousal support. “Child support and alimony, both of these are current supports, can be processed and prosecuted even despite the stay,” Borden said. “It in fact, now enjoys a privileged position.” 

 “Support, whether it’s child support, maintenance, alimony, are not discharged,” Borden said.  This rule does not apply to property settlements or back support.   Borden also warned that bankruptcy judges have a primary objective to assist the debtor, not the creditor. “Bankruptcy judges view the world through discharged colored glasses. They are all about helping debtors to get back on their feet,” he said. “They want to get the debtor as fully discharged as possible.” 

Property settlements are another big issue in bankruptcy court. Settlements can include situations in which an ex-spouse agreed to pay for the mortgage or car payment, Borden said. Settlements can also entail the owing of any kind of monetary family court award, other than support. 

In another example, Borden said if an ex-spouse agrees to take over a car payment that was financed under the couple’s names, and the individual files bankruptcy, he or she is no longer required to pay that debt. In return, however, the lending agency can turn to the other spouse and request that money from him or her, even if the ex-spouse still has the vehicle.  

According to Weber, settlements require a certain amount of examination. “The situation is this. If you have a property distribution … you now have to take a look at that,” he said.  

A lot of times bankruptcy cases involving family court claims that are discharged eventually wind up back in family court, Weber said. “When somebody files for bankruptcy, that really only applies to the collection of debt,” Weber said. “When child support and maintenance are involved you now have to go back to the family court.” 

 “The court is going to take a look. They want to know who it is going to harm more, the payer of the recipient,” Weber said. In a recent case, Weber said a woman was owed $1 million and her ex-husband filed bankruptcy. “I did an analysis of both of their lifestyles,” Weber said. “She had basically nothing.” On the other hand, Weber said the ex-husband was maintaining his lifestyle despite the folding of his business.   

The main question the family court is going to ask, Weber said, is who is most harmed by the property settlement and bankruptcy. “We compare the harmfulness to him as opposed to her,” he said. “It would certainly harm her worse (to lose the payout).”  

It is Weber’s task to review each individual’s lifestyles and determine what, if anything has really changed in terms of economic income. “I’m trying to really look behind the numbers and see what’s going on, I prepare a report and we have to testify in court,” Weber said.  

The court’s decision is going to ride on the judge’s opinion. “There is going to be two conflicting experts and the judge will believe, who he believes based on what is presented,” Weber said. “Sometimes, they try to paint a picture that is many times not accurate of their true economic income. Many times somebody is just trying to shift income around.”

Read the entire article at divorce360.

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