New Year Resolution #7: Get Past the Financial Problems Caused by Your Divorce
Chapter 13 is powerful for dealing with past-due support. But it’s even stronger in dealing with non-support divorce debts.
The Sacredness of Child and Spousal Support
A few days ago we talked about ways that bankruptcy can help specifically with child and spousal support, especially situations in which a person has fallen behind on support. (See New Year Resolution #5.) The Chapter 13 type of consumer bankruptcy is a particularly strong tool for this often otherwise very tough debt to be chased on. Chapter 13 stops the aggressive collection of past-due support in order to give time—as much as several years—to catch up on the support.
Filing bankruptcy also helps indirectly by getting rid of other debts so that you can better afford to pay the support. But neither Chapter 7 nor 13 is able to write off (“discharge”) any past-due child or spousal support whatsoever. Nor can these two kinds of consumer bankruptcy do anything to change your monthly support payment amount. That can only be done by the divorce court that set the support amount.
These limitations may give you the misimpression that if you are in financial distress after a divorce, bankruptcy is not going to help you. But both Chapter 7 “straight bankruptcy” and, again especially, Chapter 13 CAN be hugely helpful, in sometimes surprising ways.
The Protection of the “Automatic Stay” for Past-Due Support
The “automatic stay” is the part of the Bankruptcy Code that prevents almost all your creditors from pursuing you and your assets as of the moment you file bankruptcy. To be crystal clear the “automatic stay” protection does not apply to ongoing monthly support obligations, allowing, for example, a garnishment of that monthly support amount to continue in spite of a bankruptcy filing. And the “automatic stay” does not apply in a Chapter 7 case to the past-due support. But it cannot be emphasized enough that the protection does apply to past-due support obligations in a Chapter 13 case.
So if you are behind on child and/or spousal support obligations and are either currently being chased for that debt or are worried that you will be any day, you should check out how Chapter 13 could help you.
The Protection of the “Automatic Stay” for Non-Support Divorce Debts
Support obligations are only one category of debts that may arise out of a divorce. You may also have been ordered to pay a certain amount of money to your ex-spouse to make up for you getting more of the marital assets. Or you may have been ordered to pay off a joint marital debt by yourself.
A bankruptcy filing will stop the collection of these non-support obligations. But under Chapter 7 “straight bankruptcy,” the “automatic stay” protection usually only lasts the three or four months that the case generally lasts, allowing the collection efforts against you to resume after that. In contrast, a Chapter 13 “adjustment of debts” case conventionally lasts three to five YEARS, and the “automatic stay” protection lasts throughout that time.
The “Discharge” of Non-Support Obligations Under Chapter 13
More important for the long run, Chapter 7 does not discharge these non-support obligations, whereas Chapter 13 does. So if you are required to pay your ex-spouse in compensation for getting to keep the marital home or the more expensive vehicle, or if you are required to pay all of a marital debt, Chapter 13 can absolve you of those financial obligations.
So for example, if the divorce decree required you to pay $15,000 to your ex-spouse to equalize the split of marital assets, after going through a Chapter 7 case you would still owe that amount, but after going through a Chapter 13 case you would not.
Chapter 13 Requires an Effort at Paying Your Debts, However That May Make No Difference
Between Chapter 13’s advantages in dealing with past-due child and spousal support and in discharging non-support divorce debts, Chapter 13 is certainly something to look into if you have either problem, and especially if you have both. But doesn’t Chapter 13 require you to pay your creditors for three to five years, so is there a real advantage after all?
Yes, usually Chapter 13 is highly advantageous in these situations because you are only required to pay non-support obligations on to the extent you can afford to do so within a limited period.
First, sometimes the non-support debt will be paid nothing in a Chapter 13 case because there is only enough money during the required period of time to pay the higher priority debts (such as the past-due support, recent income taxes, home mortgage and vehicle loan arrearages). Nothing is paid to the pool of “general unsecured” debts, including the non-support debt.
Second, even if some money is going to the non-support debt along with the other “general unsecured” debts, the fact that you owe a non-support debt may well not add anything to the amount you would have to pay to complete your Chapter 13 case.
This is best explained by an example.
Let’s say you owe your ex-spouse the $15,000 non-support obligation referred to above. And the rest of your “general unsecured” debts (credit cards, medical bills, and such) add up to $25,000, so you have a total of $40,000 in the combination of these. You also have $8,000 in “priority” debts—let’s say a combination of the last couple years of income taxes and some past-due child support—and are $5,000 behind on your home mortgage.
Assume also that you can afford to pay $500 per month into your Chapter 13 plan for the required 3 years (that length of time depends on your income), or a total of $18,000 ($500 times 36 months). That would first go to pay the $8,000 in income taxes and past-due support and the $5,000 in past-due mortgage payments, leaving $5,000 to go to the rest of the creditors. (For the sake of simplicity this disregards any trustee fees and attorney fees.) If you did not have the $15,000 of non-support divorce debt, that $5,000 would get divided among the $25,000 in the other “general unsecured” debts, so these creditors would be paid 20% of their debts. But with the $15,000 non-support debt, that available $5,000 would get divided among the $40,000 total “general unsecured” debts, with all the creditors now being paid only 12.5%.
Note that the total amount you would be paying to these “general unsecured” creditors—$5,000—would not change. You owing the non-support debt merely reduces how much each creditor would receive out of the limited pot of money to pay them.
Different scenarios would lead to different results, so that sometimes the existence of a non-support debt DOES increase what you have to pay overall to your creditors. The point is that often the amount you have to pay overall does not change. It’s worth meeting with a bankruptcy attorney to see what would be the situation for you, and to see if you are a good candidate for a Chapter 13 case, for the reasons stated in this blog post and overall.