If you've recently determined your debt load or a reduction in income necessitates a Chapter 13 bankruptcy filing, you likely have a lot of questions -- not only about the process, but about which debts can be reorganized or discharged. If you're divorced and have alimony or child support obligations (or both), you may be wondering whether these debts are included in your Chapter 13 filing. Read on to learn more about how divorce-related obligations are treated during the bankruptcy process.
What is a Chapter 13 bankruptcy?
Unlike a Chapter 7 bankruptcy, which involves the discharge of all eligible outstanding debts (and repossession of any collateral for loans that are not reinstated, such as autos or homes), a Chapter 13 bankruptcy requires you to pay a portion of your outstanding debt. When you enter a Chapter 13 bankruptcy, you'll work with the bankruptcy trustee to establish a budget of all necessary family expenses (such as food, gasoline, utilities, and childcare). Any monthly income in excess of these budgeted expenses is remitted to the trustee, who then portions it out to debtors in order of priority.
Many debtors will eventually forgive or discharge a portion of the debt under a Chapter 13 plan -- however, some debts will need to be fully repaid. Generally, a Chapter 13 plan will last between 3 and 5 years, depending on the amount of debt that needs to be repaid relative to your income.
Once you've completed your Chapter 13 repayment plan, any eligible remaining debts are eliminated, and you're removed from the bankruptcy process. Although your credit score may take a hit while you're in bankruptcy, it will quickly recover once the process has been completed. If you are unsuccessful in your Chapter 13 repayment plan, you may be able to convert it to a Chapter 7 discharge or negotiate with your lenders outside the bankruptcy context.
Does a Chapter 13 bankruptcy filing eliminate or lower your child support or alimony payments?
Because child support and alimony payments are governed by the state court (or sometimes appellate court) in which your divorce case was filed, rather than the federal bankruptcy court, these payments are generally unable to be modified by the bankruptcy court. If you're genuinely unable to afford your payments, you can petition the trial court to modify your payments -- and if successful, this can help make these payments more manageable under your Chapter 13 repayment plan.
However, if the trial court refuses to modify your child support or alimony, the bankruptcy trustee will rank these obligations accordingly. Any current or back child support owed is given top priority in your Chapter 13 repayment plan. Alimony is also given a high priority. Neither of these obligations will be discharged after the successful completion of a Chapter 13 plan.
What does a Chapter 13 bankruptcy do to your obligation to split assets in a divorce?
During the course of your divorce proceedings, the court may have issued a division of property order requiring you to liquidate or transfer certain retirement or investment accounts. Although this is technically a debt (until it is fulfilled), filing for bankruptcy does not extinguish or toll this obligation, and these funds should be transferred outside the bankruptcy context.
If you plan to file for bankruptcy before your divorce is finalized, consult an attorney -- there may be additional complex legal issues that can delay the granting of your divorce or postpone the approval of your Chapter 13 repayment plan.
Can your child support or alimony obligations be extinguished by a Chapter 7 bankruptcy?
Just as your Chapter 13 bankruptcy will not lower your child support or alimony obligations, neither will a Chapter 7 discharge. If your Chapter 13 is converted to a Chapter 7 (or you later file an independent Chapter 7 bankruptcy) you'll still be on the hook for both types of payments until the trial court orders that these payments cease.
Contact a Chapter 7 and Chapter 13 bankruptcy attorney near you to find your best course of action.