Someone not famous said that: “The word ‘Bankruptcy’ is a lot like the word ‘War/ You think you know what it means until you experience it.” Now add in divorce law, and you have your first topic from the Creditors Rights/Bankruptcy Group.

Let’s start with terms of art. A “discharge” is the bankruptcy relief of eliminating all debts permitted under bankruptcy law. “Dischargeability” refers to the elimination of a legal liability to pay a specific debt. Certain debts, such as obligations in the nature of alimony, maintenance and child support, are not dischargeable in bankruptcy while all other debts may be discharged in the case.

A Domestic Support Obligation (“DSO”) is not dischargeable under any chapter of the Bankruptcy Code. See 11 U.S,C. §523(a)(5). A DSO is basically: a debt in the nature of alimony, maintenance and support; owed to a spouse, former spouse, or child of the debtor or such child’s parent; and is established by a separation agreement, divorce decree, or property settlement agreement or an order of a court of record.

Sounds easy? Okay, let’s say you have a separation agreement providing for the transfer of the principal residence to Wife. She is to make all mortgage payments until she refinances or sells, and she will indemnify him if she fails to do so. And she fails to do so and files bankruptcy. There is a $200,000 deficiency and the mortgagor holder sends a letter to the Husband asking him for $200,000. “But, but she is supposed to pay the mortgage!” Husband claims that the Wife’s indemnification is nondischargeable under (a)(5). What do you think?

Concerns:

1. What factors distinguish a DSO from a property division
2. A DSO is owed to a spouse or former spouse, not to a third party such as the lender.

But this is bankruptcy law so don’t give up! Another nondischargeable debt under §523(a)(15) is one owed to a spouse, former spouse, or child of the debtor that is not a DSO and 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 of record. So the husband has nothing to worry about because of(a)(15), EXCEPT a couple of courts ruled that obligations under (a)(15) are not dischargeable only if the agreement or divorce decree created “new” rights in favor of a spouse. See In re Proyect, 503 B.R. 765 (Bankr. N.D. Ga. 2013). Is indemnification a “new” right? The Husband had a right of contribution prior to the execution of the separation agreement. But, in Maryland, the entry of the divorce decree enables the spouses to each enforce certain financial obligations that they could not enforce prior to the entry of the Divorce Decree. See e.g. Md, Code Ann. Family Law Art. §§8-203, 8-204, 8-205, 8-206, 8-207, 8-208, 8-209, 8-213 and 8-214. That does not end the issue. Property division and other non-support awards under Section 523(a)(15) are dischargeable in Chapter 13 proceedings. See 1 1 U.S.C. §1328(a)(2).

Applying bankruptcy and divorce law in the same case can be quite a battle. If you have any questions on this topic, please contact James Hoffman at jhoffman@offitkurman.com or 240.507.1710.

ABOUT JAMES HOFFMAN

James Hoffman is a corporate, bankruptcy and litigation attorney and the Chair of the Creditors Rights, Restructuring and Bankruptcy Practice.  Mr. Hoffman focuses his practice in the areas of representing various business types, particularly closely held businesses and has a broad base of experience representing creditors, trustees and debtors in bankruptcy cases and litigation. In his business practice, Mr. Hoffman represents businesses through their life cycles from creation, to formulating employment and shareholders agreements, creating contracts, collecting debts and closing the business through sale or liquidation.   Mr. Hoffman has represented nine different Chapter 7 trustees, and several Chapter 11 trustees and receivers. Thus, he is “a lawyer’s lawyer.” He has been involved in handling a broad range of litigation before state courts, including disputes involving complex commercial litigation, breach of contract actions, and collection actions.

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