Chapter 7 doesn’t write off any divorce-based debts. But Chapter 13 DOES write off non-support divorce debts.
In our July 1 blog post we introduced a list of 10 ways that a Chapter 13 “adjustment of debts” can help you keep your home. Today we get into the 6th of those 10 ways. Here’s how we introduced this earlier:
6. The Chapter 13 “Super-Discharge” of Divorce Decree Debts
You can “discharge” (permanently write off) CERTAIN obligations arising out of a divorce decree in a Chapter 13 case. You can discharge debts dealing with the division of property and the division of debt. These are debts that you cannot discharge in a Chapter 7 “straight bankruptcy” case. You CANNOT discharge child or spousal support—under either Chapter 7 or 13.
So if you owe a significant amount of non-support divorce decree debt, AND there isn’t already a lien on your home securing that debt, Chapter 13 could stop a lien from being imposed. The debt would be discharged at the end of your Chapter 13 case as a “general unsecured” debt. You’d prevent liens against your home. You’d not owe any non-support debt to your ex-spouse.
Here’s how this works in practice.
Assume that you own a home. You owned it before you got married and so you were awarded it in your recent divorce. During the last year of emotional and financial turmoil you fell 5 months behind on the $1,500 monthly mortgage. So you’re $7,500 behind and also did not pay the $2,000 property tax for this year.
On top of that the divorce decree ordered you to pay two things: 1) $10,000 to your ex-spouse for his or her share of the equity built up in the house during the marriage; and 2) two credit card accounts with a combined balance of $8,500, as your share of the joint debts. You do not have to pay any child or spousal support.
Assume also that you have $35,000 in other unsecured personal debts.
Given your current steady income, you could afford the $1,500 monthly mortgage payment, but not while paying everybody else. And you don’t have any means to catch up on that mortgage or the property taxes, considering the other debts that you owe. Paying the two joint credit cards would be extremely challenging, and the $10,000 completely impossible.
Chapter 7 Not Much Help
A Chapter 7 case does not directly help with the home mortgage or property taxes arrearage. It may still provide some practical benefit. If it discharges enough other debts you may be able to somehow afford to catch up on the mortgage and property taxes. But you are at the mercy of those two creditors as to how much time you’ll have to catch up.
Furthermore, Chapter 7 does not help at all on your two divorce debts.
First, it does not discharge the $10,000 debt to your ex-spouse. You would continue to owe it in full after a Chapter 7 case would be completed. Your ex-spouse would be able to place a lien on your home to force payment of that debt (assuming that he or she does not already have a lien on the home already).
Second, a Chapter 7 does discharge your personal liability to the two joint credit card creditors (totaling $8,500 in debt). But it does NOT discharge the separate obligation you have to your ex-spouse to pay those two cards. In other words, the credit card creditors themselves would not be able to sue you to make you pay. In fact they would be forbidden to do so. However, your ex-spouse would be able to make you pay based on the divorce decree. If you didn’t pay, he or she could sue you for payment, and put a lien on your home for your non-payment.
So, Chapter 7 may help only very modestly with the mortgage and property taxes, and not at all with the divorce debts. It does not help protect your home.
The Chapter 13 Solution
Chapter 13 helps infinitely more on the both the home debts and the divorce ones.
With the unpaid mortgage and property taxes, as long as you followed some reasonable rules you could have 3 years, or even as much as 5 years, to catch up. Throughout that time your home is protected from foreclosure and other collection efforts.
Even more impressive, the $10,000 debt to your ex-spouse is forever discharged at the successful completion of the case. Same thing with your obligation to your ex-spouse to pay the $8,500 in the joint credit cards—discharged.
More precisely, those $10,000 and $8,500 obligations would be lumped in with your $35,000 in other unsecured debts. You would only need to pay that combined $53,500 if and to the extent you could afford to do so.
Let’s say your Chapter 13 case is required to go 36 months. (Its length is largely based on your income). Let’s also say that beyond paying your regular monthly mortgage you could afford to pay $300 per month towards all of your other debts and obligations. That would only be enough to catch up on the mortgage and property taxes in 36 months. (Some would also go towards trustee and attorney fees).
This would leave no money available for the $53,500 in other debts, including for the divorce debts. That generally means that you would not have to pay anything towards all those other debts. And again, at the end of the Chapter 13 case those debts would all be permanently discharged.
Under other facts you may have to pay something towards these divorce debts and the other unsecured debts. But usually that ends up being only pennies on the dollar. And again, sometimes nothing at all.
So, under Chapter 13 you’d stop your ex-spouse from putting a lien on your home for non-support obligations. You’d be able to catch up on your home payments with payment terms based on your budget. And after that, after paying only as much as you could afford, if any, towards your non-support divorce debts, you would owe nothing more. Your home would have avoided any liens from those divorce debts. And those debts would be history.