A recent ruling by the Nebraska Bankruptcy Court underscores one of the primary differences between the treatment of divorce debts in Chapter 7 and Chapter 13 cases. (See In re Schulz, Nebraska Adversary Case #12-04070).
On August 30, 2011, the District Court for Buffalo County, Nebraska entered a divorce decree that included a division of marital property and debts requiring Cynthia Shultz to pay her ex-husband $25,000. One year later Ms. Schultz filed Chapter 13 bankruptcy. Although Mr. Shultz filed an unsecured Proof of Claim for $24,104.27, he failed to object to the Chapter 13 plan which was eventually confirmed by the Court on June 5, 2012.
Following confirmation of the plan, Ms. Shultz filed an Adversary Proceeding to seek a determination that the property settlement agreement was dischargeable upon completion of the payment plan. Both parties agreed that the $25,000 debt was property settlement and not intended for support of Mr. Shultz. Although Mr. Shultz argued that his ex-wife had the ability to pay the debt and that the harm to him caused by a discharge of the debt would outweigh the benefit of the discharge to his ex-wife, the bankruptcy court was compelled to rule in favor of the debtor. Since enactment of the bankruptcy reform act of 2005, bankruptcy courts no longer conduct a “balancing test” to determine if property settlement agreements are dischargeable in Chapter 13. They just plain are discharged every time as long as a debtor successfully completes the payment plan.
The real issue in Chapter 13 cases since 2005 is to determine whether a provision in a divorce decree is in fact a property settlement provision or a support provision. Importantly, this issue only pertains to Chapter 13 cases.
In chapter 7 cases neither property settlement nor support obligations are dischargeable in bankruptcy. So, the challenge of the bankruptcy attorney in Chapter 13 cases is to characterize the relevant divorce decree provision.
Courts look at several factors when determining whether a provision is a Support provision or a Property Settlement provision:
- Labels in the Divorce Decree: Although the bankruptcy court can look beyond the labels contained in a divorce decree to determine the true nature of a provision, labels do matter. A thing tends to be what it says it is.
- Income Needs of the Parties: The bankruptcy court will look to see if the party receiving the settlement was in need of the funds to meet basic living expenses at the time the divorce decree was entered.
- Analysis of Property Divided: The bankruptcy court will review the property divided prior to the entry of the divorce decree and will consider the nature of the property divided. For example, the division of the sales proceeds of a yacht is probably more in the nature of a property settlement than an award of a10-year old minivan.
- Does the obligation to pay terminate upon remarriage or the emancipation of a child? If so the provision tends to be considered a support payment.
- Number of Payments: If the amount to be paid is in a lump-sum or in a few large payments, it tends to be considered property settlement. Smaller payments spread out over a longer period of time are usually deemed support.
Divorce attorneys need to pay particular attention when the ex-spouse of their client files bankruptcy. If a chapter 7 case is filed the divorce decree is generally secure. However, if the ex-spouse files a Chapter 13 a Red Alert should be sounded. Important consideration must be paid to how a proof of claim is filed and the relevant deadlines to challenge confirmation of the plan and the deadline to object to the dischargeability of the divorce decree obligation.