Are you considering filing Chapter 7 bankruptcy on alimony? Read on to get answers to common questions about filing Chapter 7.
Are you in a position where you have to file Chapter 7, but you’re unsure how it affects alimony?
In times of financial distress, Chapter 7 personal bankruptcies continue to be the most common type filed, although they have lessened in recent years. Matters become slightly more complicated when filing Chapter 7 bankruptcy while having to pay alimony. What is the effect that filing this type of bankruptcy has on alimony payments, and does it discharge obligations?
We cover everything you need to know and how a Chapter 7 bankruptcy lawyer can help if you need assistance, so you can remain informed about the process and understand what to expect.
The Rule on Alimony and Filing Chapter 7
Chapter 7 bankruptcy, or liquidation bankruptcy, can clear unsecured debts such as credit card bills, medical bills, and other types of debt with no collateral. Chapter 7 should be considered a last resort as it has a huge impact on your credit score and creditworthiness.
How Does Chapter 7 Work?
When you file for bankruptcy, the court will put a temporary stay in place on your debt. Creditors can’t collect payments, foreclose on your home, garnish your wages, evict you, or shut off your utilities. The court has possession of your property at this point, and you’ll receive a bankruptcy trustee.
Your bankruptcy trustee looks over your financial situation and sells the non-exempt assets.
Examples of exempt assets include but aren’t limited to:
- Clothing, furnishings, and essential items
- Vehicles up to a set value
- Tools and items necessary to a person’s job or trade
- Pensions and/or benefits
- Jewelry up to a set value
- Unpaid but earned wages
Exempt assets include necessary and essential items a person needs on a daily basis or for their job.
The following are common examples of non-exempt assets:
- Bank account funds
- Cash
- Stocks or bonds
- Valuable musical instruments (unless required for a profession)
- Antiques
- Second homes
- Additional vehicles
- Vacation properties
These proceeds go toward paying off your debt. The Chapter 7 bankruptcy process usually takes between four to six months.
The court will discharge most remaining debts. However, it’s important to note that certain types of debt aren’t dischargeable.
Making Alimony Payments
So what happens if you’re making alimony payments and filing Chapter 7? Are you still required to make alimony payments, or are these payments discharged?
Alimony payments are court-ordered provisions, and they fall under debts that aren’t dischargeable.
If you’re the supporting spouse, the alimony obligation does not stop even when filing Chapter 7 bankruptcy. So if John pays his ex-wife $1,200 a month in alimony, he still has to make those payments during and after the case.
Banks can often absorb the loss from a Chapter 7 discharged debt, unlike single parents. Many single parents would struggle if the alimony obligation diminished or stopped altogether. Therefore, supporting spouses cannot eliminate alimony payment obligations by filing Chapter 7 bankruptcy.
United States Bankruptcy Code states in Section 523 that debtors can’t discharge domestic support obligations. These are debts owed to the debtor’s spouse, ex-spouse, child, and so on as stated in your divorce decree, property settlement agreement, or separation agreement.
Exceptions to the Rule
There are a few situations that prove exceptions to the rule stated in Section 523. In these situations, a supporting spouse may be able to discharge their spousal maintenance once they file for Chapter 7 bankruptcy.
If it’s stated in the divorce decree that the obligation owed to your spouse is not necessarily alimony. There are alternatives to alimony payments that you might state in the divorce decree are treated as alimony. For instance, perhaps the supporting spouse must pay a marital debt to a company.
In some instances, the supporting spouse might be able to discharge their obligation if that obligation was assigned to a third party. For example, a parent may be assigned the right to collect alimony. When the ex-spouse files for bankruptcy, that alimony obligation might become dischargeable.
A bankruptcy judge may change the supporting spouse’s amount owed if the spouse is no longer responsible for these payments. Another example is if the supporting spouse is incapable of paying alimony due to their financial and economic situation. The judge may also lower or adjust the payment amount.
These exceptions aside, it’s never a good idea to file Chapter 7 bankruptcy to escape alimony payments as this is usually not a dischargeable debt.
Receiving Alimony Payments
What if you’re the one receiving alimony, and you’re filing Chapter 7? In this case, you must report those alimony payments on Schedule I and a 122A means test.
The bankruptcy means test determines who qualifies for Chapter 7 bankruptcy. It considers your income, family size, and expenses to determine if you have enough disposable income to pay off your debt. The purpose of the test is to limit the number of people filing Chapter 7 bankruptcy, though many people who take the test still qualify.
Anyone that doesn’t qualify, or those that want to hold onto assets, can file Chapter 13 bankruptcy and restructure their debts.
First, the means test collects information about your household income and determines if it’s below your state’s median income. The test is based on the last six months.
People below the median income can file Chapter 7 bankruptcy. If you do not fall into this category, there is a second part of the test that considers information about expenses.
The Benefits of Consulting a Bankruptcy Lawyer
Whether you’re the supporting spouse or dependent spouse, it benefits you to talk to a bankruptcy and divorce lawyer. After all, bankruptcy post-divorce is a complicated issue.
If you have questions about Chapter 7 bankruptcy and alimony payments, such as whether it’s a good idea to file or whether you might fall under one of the exceptions to the Section 523 rule, a bankruptcy lawyer can help. They’ll assist you through the entire process and keep you informed.
Take the Next Step
If you plan on filing Chapter 7 bankruptcy, you need to know how it affects alimony. This article is designed to provide you with the basic information, but you should contact a bankruptcy lawyer to discuss your case.
Take charge of your finances and get a fresh start. Contact Husker Law Attorneys today at 402-415-2525 for an initial consultation.
