How certain payments owed under a divorce or family law decree—including child support, spousal support (also called maintenance or alimony) and even property settlements or cash equalizers— may impact your bankruptcy filing depends on whether you are the recipient such payments or the obligator of such payments, i.e., the payer.
For a recipient of child support, spousal support or other domestic support obligations (also called “DSO”), this support income must be added to all other sources of income in order to determine whether one is eligible to file chapter 7 under the means test. Generally speaking, if one’s total annual income from all sources including domestic support income is less than the median income for your state and household size, you will qualify for chapter 7. However if you are above the median income, you are instead steered toward filing chapter 13 with some exceptions. Median income varies by state and household size and is regularly updated. Especially if you are ‘on the line’ of the median income or above it, it is the initial job of any bankruptcy attorney to calculate the means test and advise on eligibility for chapter 7 under current median income standards.
For the payer of domestic support obligations, such support payments are typically allowed as an expense on the means test which effectively reduces one’s annual income. This means that if your regular wage or self-employment income is above the median income for your state and household size but the subtraction of domestic support payments brings you back down below the median income, then you would qualify for chapter 7 bankruptcy. Qualification for chapter 7 via this route is also called “rebutting the presumption of abuse” on the means test. However if one’s income is such that the subtraction of DSO payments does not reduce the income below the median or alternatively if one is not actually making the required DSO payments, then they may not qualify for chapter 7 and instead file chapter 13.
The means test involves various additional factors other than income and domestic support payments. For more information about median income and the means test, see What is the “Means Test” and Why Does it Matter in Bankruptcy? and 2014 Median Income in Minnesota.
Regarding property settlements (also sometimes referred to as equalization payments or cash equalizers), these are usually ordered in a divorce based on a fair distribution of marital assets rather than a need for financial support by one spouse. For example, a wife may be ordered to pay a property settlement to her ex to “equalize” her award of a family home having equity that was built up during the marriage. In this case, the wife that keeps the family home may be required to pay her ex-spouse one half of the home equity by a certain future date. Property settlements also commonly arise when one spouse is assuming most or all of joint debts acquired during the marriage and the other spouse emerges from divorce debt free other than the obligation to pay the property settlement. In any event, unpaid property settlements and cash equalizations are valuable assets that must be listed in the bankruptcy case of the recipient.
As with all assets, any individual bankruptcy debtor is limited as to the total value of assets which may be exempt and it’s possible that a portion of a large unpaid property settlement (above approx. $12,000) could be non-exempt if the recipient files bankruptcy. In this case, the non-exempt portion of the property settlement would become property of the bankruptcy estate and either liquidated in chapter 7 or, in chapter 13, at least the equivalent of the non-exempt portion must be paid into the plan. This situation is also circumstance dependent and may be affected by the facts of one’s situation, including whether the obligator spouse has a practical ability to pay the settlement.
For the payer of the property settlement, this award is a liability that must be listed in the creditor schedules. Unlike most debts, one’s liability to pay a property settlement is not usually discharged in chapter 7 bankruptcy however may be discharged under some circumstances in chapter 13 bankruptcy.
A qualified bankruptcy attorney will explain more how a property settlement would be treated under your specific circumstances, the chapter of bankruptcy you file and local bankruptcy law. For more information on how property settlements are treated in chapter 13, see Bankruptcy and Divorce: Some Payments in a Divorce Decree May be Dischargeable in Chapter 13.
Also read more about family law and timing considerations in bankruptcy: Bankruptcy and Divorce: What Should Come First?
Located in Edina, Minnesota, attorney Lynn Wartchow represents clients in all chapters of bankruptcy in Minneapolis, St. Paul, Ramsey and Hennepin County, and throughout Minnesota. Contact for a free consultation.