The financial crisis that the COVID-19 pandemic has caused has been devastating to many individuals and businesses. It is likely that there will be a large influx of bankruptcy filings in the coming months due to the financial destruction of this pandemic. If you have a pending divorce action or a final judgment of divorce and your spouse or ex-spouse has chosen to file for bankruptcy, you should be aware of the definition of “domestic support obligations” (“DSO”) and how DSO’s are treated in bankruptcy.
In this post we will define DSO’s and further explain whether one’s DSO obligation survives the debtor’s bankruptcy (i.e. whether the debt is able to be discharged as a result of bankruptcy).
The dischargeability of an obligation created by a divorce decree, separation agreement, property settlement agreement, court order, or administrative determination depends on whether the obligation is classified as a DSO and whether the debtor filed for bankruptcy under Chapter 7 or Chapter 13 of the federal bankruptcy code (the “Code”).
In this post we will only address dischargeability in the context of Chapter 7 bankruptcy cases.
Statutory Definition of a Domestic Support Obligation
In 2005, Congress revised the federal bankruptcy code and introduced the term “domestic support obligation.” Pursuant to section 101(14A) of the Code, a DSO is a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is—
(A) owed to or recoverable by—
(i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or
(ii) a governmental unit;
(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;
(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of:
(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and
(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.
In short, a DSO is any debt incurred before or after a bankruptcy case is filed that is:
- owed to or recoverable by a spouse, former spouse, child or governmental unit;
- “in the nature of alimony, maintenance, or support”; and
- established pursuant to the terms of a divorce decree, separation agreement, property settlement agreement, court order or administrative determination, including interest that has accrued.
“In the Nature of Support” Obligations
One reoccurring question that arises in the context of bankruptcy filings is whether an award made in a party’s matrimonial case meets the statutory requirement of being “in the nature of support”.
This is a factual determination that is made by the bankruptcy court as it is a question of federal law and requires a fact intensive, case specific analysis. See Ning Yen Yao v. Kao (In re Kao), 612 B.R. 272, 281 (Bankr. S.D.N.Y. 2020); In re Dudding, No. 10-10557, 2011 Bankr. LEXIS 1128, 2011 WL 1167206, at *5 (Bankr. D. Vt. Mar. 29, 2011); Grinspan v. Grinspan (In re Grinspan), 597 B.R. 725, 737 (Bankr. E.D.N.Y. 2019).
In order for the bankruptcy court to make its determination it must determine the intent of the parties and consider as relevant “[a]ll evidence, direct or circumstantial, which tends to illuminate the parties’ subjective intent.” Brody v. Brody (In re Brody), 3 F.3d 35, 38 (2d Cir. 1993). Bloch v. Bloch, No. 09-CV-3963(RRM), 2010 U.S. Dist. LEXIS 99891, at *6-7 (E.D.N.Y. Sep. 23, 2010).
For example, the court will look at the substance and not just the form of payments to determine whether an obligation is considered to be a DSO.
Courts have found that “the nature of the debt is more important than the identity of the payee.” In re Mason, 545 B.R. 462, 466 (Bankr. S.D.N.Y. 2016).
In fact, after looking into the intent of the parties the Court may determine that payments to third parties, such as payments made to the mortgage on a former marital residence, may constitute alimony or support.
A debtor’s duty to pay for the education expenses of a minor child and to provide medical coverage for a minor child are usually deemed to be “in the nature of support” and cannot be discharged in bankruptcy, as well as a debtor’s duty to maintain life insurance with the minor children as beneficiaries.
Chapter 7 Bankruptcy and Discharge – Obligations or Debts That a Party May Incur in the Course of Divorce or Separation
Obligations that qualify as DSOs are exceptions to the debts that are discharged under Bankruptcy Code § 523(a)(5), and therefore survive bankruptcy and are not dischargeable.
Similarly, pre-petition alimony, maintenance and child support (i.e. spousal and child support) are not dischargeable.
Further, pursuant to the language of Bankruptcy Code § 523(a)(15), an individual may not discharge “any debt to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor 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, or a determination made in accordance with State or territorial law by a governmental unit.”
What this means is that in a Chapter 7 bankruptcy case, obligations or debts that a party may incur in the course of a divorce or separation cannot be discharged. Such obligations or debts may include, among others:
- equitable distribution payments,
- lump sum distributions and payments,
- credit card and charge account obligations,
- mortgage and HELOC payments,
- homeowner’s association dues,
- income tax obligations,
- automobile loan payments,
- indemnification and hold harmless obligations, and
- medical bills.
Therefore, determining whether a debt qualifies as a DSO or some other type of obligation resulting from a divorce or separation is of no consequence as all are non-dischargeable either under Bankruptcy Code § 523(a)(5) (for DSOs) or Bankruptcy Code § 523(a)(15) (for different types of obligations resulting from a divorce), as applicable.
In Tarone v. Tarone (In re Tarone), the court found that it was “irrelevant” whether maintenance and attorneys’ fees awarded by the state court in the course of the divorce proceedings “constitute[d] true support obligations” because even if not encompassed within Bankruptcy Code § 523(a)(5), they are nondischargeable pursuant to Bankruptcy Code § 523(a)(15). 434 B.R. 41, 49 (Bankr. E.D.N.Y. 2010).
However, it is important to keep in mind that in the context of a case filed under Chapter 13 of the Bankruptcy Code, debts incurred during the partition of the marital property are dischargeable. Therefore, a detailed analysis of how a debt was incurred is necessary in a Chapter 13 bankruptcy case to determine whether the debt will survive the bankruptcy.
Bankruptcy is a unique area of law for which individuals should get detailed legal advice and counsel. Jaspan Schlesinger attorneys are available to provide comprehensive legal services in both bankruptcy and matrimonial family law to help you make smart decisions about what matters to you when it most matters to you. We are also committed to guiding our clients through these unprecedented and trying times.
The material provided in this blog is meant only to provide general information and is not a substitute nor is it legal advice to you. Readers of this article should seek specific legal advice from legal counsel of their choice. You can reach Sophia Perna-Plank at spernaplank@jaspanllp.com or (516) 393-8270 or Marissa Pullano at mpullano@jaspanllp.com or (516) 393-8297.