Treatment of Property Settlement Claims

Certain property settlements are not dischargeable in a Chapter 7, 11 or 12 bankruptcy case, but remain dischargeable in Chapter 13 cases. Support, alimony or maintenance 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 are generally not dischargeable. There are a few exceptions to this rule such as when the debtor does not have the ability to pay those debts from income or property that is not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor or when discharging the debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor. The court uses a disposable income test and a balancing test to determine whether or not these types of property settlement claims are dischargeable.

Disposable Income Test

Under the disposable income test, the court evaluates whether the debtor has the ability to pay the non-support debt/property settlement over a period of time. The court considers the following factors in determining a debtor's ability to pay the non-support debt:

  • The debtor's disposable income
  • The existence of more lucrative employment opportunities for the debtor
  • The extent to which the burden of paying the debt may be lessened in the future
  • The debtor's good faith toward satisfying the debt prior to bankruptcy
  • The amount of debts that a creditor is seeking to have held non-dischargeable and the terms and conditions for repayment
  • The assets retained by the debtor
  • Any probable changes in the debtor's future expenses
  • The amount of the debt in question

Balancing Test

The court must weigh the detriment of discharging the debt to the ex-spouse and the benefit of the discharge to the debtor. This test is used to prevent the use of bankruptcy to evade marital property settlements when the debtor does not have bona fide financial problems. The court considers various factors for the balancing test including:

  • Changes in the financial condition of the parties from the time of the divorce or separation to the filing of the bankruptcy petition
  • The relative income and worth of the parties, including the parties' assets as well as those assets of their respective spouses
  • A comparison of the parties' post-bankruptcy obligations
  • The amount and nature of the debt involved and whether a non-debtor spouse is jointly liable on the debt
  • The health, job skills, training, age, and education of the parties and their spouses
  • The number of dependents of the parties and their spouses as well as ages and any special needs
  • The amount of debt that either has been or will be discharged in the debtor's bankruptcy
  • Whether the parties have acted in good faith

If the debtor is able to carry his or her burden of proof under either the disposable income test or the balancing test then the debt will be discharged. The burden is met if it weighs in favor of the debtor by a fair preponderance of the evidence.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.





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