Florida Bar Journal

Domestic Relations Obligations: Dischargeable or Not in Bankruptcy?

Identifying family court obligations that may be discharged in bankruptcy is more nuanced than it would appear because it requires an analysis of the U.S. Bankruptcy Code sections and an analysis of relevant state laws. This article reviews the relevant Bankruptcy Code sections and discusses the process by which the bankruptcy court conducts its analysis. The determination of whether a family court obligation is dischargeable is pursuant to bankruptcy law. However, there is no federal domestic relations law, so the bankruptcy court will look to the state court law and the state court’s ruling or the language of the parties’ agreement in applying the Bankruptcy Code definitions. Interestingly, the state court has concurrent jurisdiction to make a determination as to whether a domestic relations obligation is dischargeable or not; however, the state court must apply bankruptcy law. The authors also provide a chart (Interpretation of Domestic Debt Being Dischargeable in Bankruptcy) that covers many cases, both state and federal, that have applied this analysis, and which reflects how nuanced this process can be.

Definitional Analysis — Bankruptcy Code

There are two primary sections concerning matrimonial debt: 1) 11 U.S.C. §523(a)(5) (exempting from discharge debts arising from DSOs); and 2) 11 U.S.C. §523(a)(15) (exempting from discharge non-DSO claims, that is any obligation, including equitable distribution, owed to a spouse, former spouse, or child). Both sections were significantly modified by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) and the changes were specifically designed to eliminate litigation over family issues in bankruptcy court. As one commentator opined, BAPCPA would result in “a reduction in the need for family support creditors to appear in bankruptcy court and a related reduction in the cost and uncertainty inherent in litigating family support issues in bankruptcy court.”^[1]
Despite congressional intentions, the law sometimes has unintended consequences. In this regard, the caselaw surrounding the issue of whether a domestic relations obligation is a domestic support obligation (DSO) under §523(a)(5) or whether it is a debt described by §523(a)(15) is reviewed on a case-by-case basis. This analysis also applies to paternity settlement agreements, which generally only address child support and time sharing.

11 U.S.C. §523(a)(5) — Domestic Support Obligation

The term “DSO” is defined in 11 U.S.C. §101(14A) and excepted from discharge under 11 U.S.C. §523(a)(5). In a summary of the four components outlined in §101(14A), a DSO is for a debt that 1) is owed to or recoverable by a spouse, former spouse, or child, or government unit for a spouse, former spouse, or child; 2) is in the nature of alimony, maintenance, or support, whether or not the debt is expressly so designated; 3) has been established before, during, or after the filing of bankruptcy in a separation agreement, divorce decree, property settlement agreement, order of a court of record, or determined by applicable nonbankruptcy law or governmental unit; and 4) has not been assigned to a nongovernmental entity unless such assignment is by the spouse, child, child’s parent, guardian, or responsible relative for the purpose of collecting the debt.^[2] In Chapters 7, 11, and 13, any 11 U.S.C. §523(a)(5) debt is nondischargeable, as long as it meets all four elements of the definition of a DSO.^[3]

However, if one of the above-referenced four elements is missing, the obligation will not qualify as a DSO — such as former spouse no longer being responsible to pay the attorneys’ fees;^[4] or former spouse having no responsibility for the evaluator’s debt.^[5] In the discharged circumstances, the debt was owed to a third person and the former spouse would not have any responsibility for the debt if it was not paid by the debtor and, therefore, the debt was not “owed to or recoverable by” the objecting creditor — former spouse.

11 U.S.C. §523 (a)(15) — Referred to as Non-DSO Obligations

The alternative domestic relations debt excepted from discharge is described in 11 U.S.C. §523(a)(15). The BAPCPA changed 11 U.S.C. §523(a)(15) to address the issue of non-DSO obligations, including equitable distribution and property settlement claims not covered under the definition of 11 U.S.C. §523(a)(5) in order to protect family court awards and settlement agreements from discharge. Similar to a DSO, both the state courts and the bankruptcy courts have concurrent jurisdiction to determine the dischargeability of either debt. Again, the determination of dischargeability would be made under bankruptcy law even if the judicial officer is in the state court.

The language of §523(a)(15) appears to be quite straightforward: any marital obligation that does not fit the definition of a DSO claim will also be non-dischargeable in a Ch. 7 or Ch. 11, but may be dischargeable in a Ch. 13; however, there are cases in which different bankruptcy courts have found certain obligations nondischargeable under §523(a)(5) while other bankruptcy courts have found the identical debt being in the nature of support, therefore, nondischargeable under §523(a)(15).^[6] Because of such, an attorney must review each claim on a case-by-case basis.

Different Discharges — Different Results

It is significant to note that 11 U.S.C. §727 applies to all Ch. 7 cases and, therefore, the standard for all Ch. 7 discharges is the same; while the standards for Ch. 13 discharges vary.

There are two distinct discharges in Ch. 13 — the full payment discharge of §1328(a) and the hardship discharge of §1328(b). The former occurs when the payments in the confirmed plan are fully paid. The latter occurs when the debtor does not fully pay but requests what is known as a “hardship discharge.” The hardship discharge comes at a price. In requesting a hardship discharge of all debts, the domestic relations debt under 11 U.S.C. §523(a)(15) will not be dischargeable.

Unique Interaction of 11 U.S.C. §523(a)(15) and Ch. 13 Discharge

As previously stated, a domestic relations obligation that fits the definition of 11 U.S.C. §523(a)(15) is dischargeable in Ch. 13 (with the exception of the “hardship discharge”). If it is dischargeable, the debtor would include the debt as an ordinary unsecured obligation in the Ch. 13 plan and pay whatever percentage is approved in the plan over time. However, all is not necessarily lost. As a practice tip, the non-debtor spouse holding the 523(a)(15) claim still has the tool of being able to file an objection, as a priority creditor, against any Ch. 13 plan proposed by the debtor. If a debtor cannot get a plan approved and confirmed. the debtor cannot get a discharge and, therefore, the 523(a)(15) obligation will remain fully owed. Additionally, if the debtor is not otherwise current in support obligations while in Ch. 13, the plan cannot be confirmed or proceed to discharge in the bankruptcy court; and, again the 523(a)(15) obligation would survive. This is true even if the debtor either converts to a Ch. 7 or if the bankruptcy case is dismissed.

The Attorney’s Role: Is Bankruptcy a Good Option for the Discharge of Domestic Obligations?

Attorneys should first determine what type of domestic relations obligation is owed by the debtor. If the obligation fits the definition of a DSO, it is non-dischargeable in Chs. 7, 11, and 13. If the obligation does not fit the definition of a DSO and if it is a property division or obligation under a marital settlement agreement or domestic court’s order, it would be an “(a)(15)” debt, which is non-dischargeable in Ch. 7 but generally dischargeable in Ch. 13 (with those exceptions mentioned above).

Because bankruptcies can occur after a final judgment is entered in a family court case or while the family court case is pending, timing of the bankruptcy filing may be of importance. If a family court case is pending, the debtor or nondebtor must request relief from stay to proceed in the family case and attorneys for both parties should be conscious of the language in any settlement or final judgment describing the domestic relations obligation. Note: If bankruptcy is filed while the domestic action is pending, state domestic attorneys would be advised to be more sensitive to the issues delivered in this article.

Bankruptcy counsel for the potential debtor will need to review the domestic court order awarding the marital obligation or will need to carefully review the marital settlement agreement or final judgment, prior to deciding whether to file bankruptcy; and, if bankruptcy is deemed advisable, counsel must determine what chapter. In reading those documents, bankruptcy counsel should analyze, with the client, what the intentions of the parties were when making the settlement, because that will be the analysis by the bankruptcy court. It is important to be aware that labels placed on a claim contained within the marital settlement agreement and/or final judgment are instructive only and are not binding on the bankruptcy court.

The Court’s Application of the Law to the Determination of the Nature of the Debt

Uniquely, a determination of dischargeability can be made by either the bankruptcy court or the family court. In order to make this determination, the bankruptcy court must look to the intention of the parties.^[7] Bankruptcy courts are required to review challenges to discharge of marital obligations under federal bankruptcy law. Since there is no actual bankruptcy family law, the following are the factors that the court in In re Benson, 441 Fed. App’x 650 (11th Cir. 2001), considered in determining the parties’ or the court’s intentions:

Thus, a debt is a domestic support obligation if the parties intended it to function as support or alimony, even if they called it something else. [Cummings v. Cummings, 244 F.3d 1263, 1265 (11th Cir. 2001)]. The court’s decision should also be informed by state law. Id. But there are other factors a court should consider as well. They include: (1) the agreement’s language; (2) the parties’ financial positions when the agreement was made; (3) the amount of the division; (4) whether the obligation ends upon death or remarriage of the beneficiary; (5) the frequency and number of payments; (6) whether the agreement waives other support rights; (7) whether the obligation can be modified or enforced in state court; and finally (8) how the obligation is treated for tax purposes. In re McCollum, 415 B.R. 625, 631 (Bankr. M.D. Ga. 2009).^[8]

Examples of this analysis include Cummings v. Cummings, 244 F.3d 1263, 1265 (11th Cir. 2001). In Cummings, the state court awarded the wife $5,150 per month as child support, 15 months of rehabilitative alimony, denied permanent alimony, and awarded $6.3 million of equitable distribution payable in three lump sum payments.^[9] The debtor/husband claimed that the $6.3 million was a property division and not for support, because she was denied permanent alimony.^[10] The bankruptcy court and the district court agreed.^[11]

The former wife appealed, and the 11th Circuit reversed the district and bankruptcy courts’ rulings.^[12] The 11th Circuit found that the true intent of the parties was for the equitable distribution to act as support and it was, therefore, nondischargeable.^[13] Specifically, the opinion found:

The divorce court indicated several times that Susan Cummings would depend on a portion of the equitable distribution to support herself and the children. The court explained its denial of permanent alimony by stating that ‘[t]he Wife will be able to support herself and the children. . . upon receipt of the income-generating assets awarded her in the equitable distribution.’ Thus, the divorce court declined to award permanent alimony precisely because it believed that Susan Cummings would be able to support herself and the children with the proceeds of the equitable distribution. Cummings, 244 F.3d at 1266.^[14]

Florida domestic law demands equitable distribution by statute, F.S. §61.075 (2018), and equitable distribution of property can be used as property division solely or as a distribution of property to provide support for the family, as lump sum alimony.^[15]

In a Ch. 13 case, Mr. Benson asserted that mortgage payments that he agreed to pay were not in the nature of alimony, support, or maintenance, and, therefore, such obligations were dischargeable §523(a)(15) debts, as opposed to DSO of §523(a)(5).^[16] The 11th Circuit in Benson, which cited its decision in Harrell, disagreed with the debtor and found that the Ch. 13 debtor/former husband’s obligation under the marital settlement agreement to pay the mortgage on the marital home was a DSO. Another factor that a Florida court will consider is that the nonpayment of support by a domestic obligor can be enforced by contempt. Alternatively, in Florida, noncompliance with a property settlement can be enforced — but not by contempt.^[17] So if the Florida debtor arrives in bankruptcy subjected to a state court contempt order, the bankruptcy court might be persuaded that the obligation was for support and, therefore, a DSO.

Preparing for Bankruptcy

Former spouses who anticipate that the payor spouse may file bankruptcy want their debt to be described as a DSO and, therefore, nondischargeable under either Ch. 7 or Ch. 13 and be a priority debt. Consequently, family law attorneys representing the spouse receiving support will draft language that expresses the intentions of the parties. It would be prudent to look for the following examples of language for any agreement or court order when identifying an obligation as a §523(a)(5) marital debt:

• Attorney’s Fees — “Because of the disparity in the parties’ respective incomes, earning capacity and financial positions, the husband shall pay the sum of $ as and for the wife’s attorney fees and costs, pursuant to F.S. §61.16.”

• Obligation to Pay a Joint Debt — “Relieving the husband of his obligation to pay the joint debts is necessary to enable him to maintain the family home and provide his share of support for the minor children.”

• Monetary Award as a DSO — “The payment of $is to provide for the support and living expenses of the spouse or minor child; or [the payment of $ is intended to pay for the mortgage on a home]; or [other necessities for the child or the spouse.]”

Attorneys’ Fees Concerns/Adversaries Are Costly

Starting adversary litigation to determine the discharge of a debt can be costly, especially when attorneys’ fees for the adversary can be tagged as part of the domestic relations debt. In the 11th Circuit, the court determined that attorneys’ fees awarded while litigating dischargeability of DSO issues are themselves nondischargeable DSOs.^[18]

In Florida, attorneys’ fees can only be awarded by contract or by statute. Most Florida family case fee awards are awarded under the attorneys’ fee statute, F.S. §61.16 (1996), which requires that the primary consideration in the award of attorneys’ fees is the need of one party and the ability of the other to pay those fees.

If the attorneys’ fees award cannot fit into the definition of a DSO because there was no consideration of need and ability to pay, fees may still be identified as a nondischargeable non-DSO debt if the fees were awarded by marital dissolution contract. If a provision of a marital settlement agreement provides prevailing party attorneys’ fees for enforcement, such clause could make such an award non dischargeable as 11 U.S.C. §523(a)(15) in a Ch. 7, but not in a Ch. 13.^[19]

Conclusion

As in all litigation, the outcome of a dischargeability action in either bankruptcy court or state court is expensive and uncertain for the parties. Consequently, it is important for bankruptcy attorneys to perform due diligence before placing a client in bankruptcy by carefully reviewing the definitions of 11 U.S.C. §§523(a)(5) and (a)(15) and then applying them to the language of the state court order or the parties’ marital or property settlement agreement(s).

Because the caselaw concerning the marital debt dischargeability is forever growing, the authors have attached a chart outlining some of the decisions on this issue. The authors hope the chart can aid as a quick reference guide to this growing area of law.

This column is submitted on behalf of the Family Law Section, Douglas A. Greenbaum chair, and Krystine Cardona, editor.