Bankruptcy and Alimony

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The financial support of spouses after a married couple has gone through a divorce is known as alimony. The purpose of alimony is that one spouse is able to provide financial support to the other. Alimony is usually ordered or arranged when in a marriage one partner was making income and the other partner stayed home to take care of it. Partners who stayed at home are most commonly the recipients of alimony.

Is Couple Able File for a Divorce and Bankruptcy Simultaneously?

The short answer is yes, a couple is able to file for bankruptcy while going through a divorce. When a couple files for bankruptcy, there is an automatic stay placed on any actions related to collection. An automatic stay means that creditors are not able to try to collect or collect any debts from the people filing for bankruptcy which the proceedings are taking place. This includes any lawsuits or other types of legal actions. An automatic stay doesn’t include any disputes on domestic supports. These types of disputes include divorce, alimony, and child custody.

Alimony During Bankruptcy

Alimony payments are usually not dischargeable or affected through bankruptcy, which will certainly please a supported spouse. In the Bankruptcy Code Section 523(a)(5) states that spousal support is a debt that is nondischargeable.

What is Alimony?

Domestic support is the only support that is non dischargeable under bankruptcy law. If there are payments that are related to domestic support, however, they do not include spousal support, they are able to be discharged. For instance, if in an alimony agreement there was a required late fee payment if the spouse was late on their payment of alimony. The bankruptcy court could decide that the late fees were only used to encourage the supporting spouse to make the alimony payment, however, the fees are not actually alimony.

Can Alimony Change During Bankruptcy?

There are two cases in which alimony payments are able to be changed during bankruptcy.

  • If alimony has been assigned or transferred to a third party, for instance a lender, then the alimony is dischargeable. Alimony is non-dischargeable if it is paid directly to their former spouse. Once the alimony is paid to a different party other than the spouse, it does not count as alimony.
  • If it is a Chapter 13 bankruptcy, the supporting spouse is able to lower the amount of alimony they pay each money during debt payment if it is part of the debt repayment plan.

If the Supporting Spouse is Going Through Bankruptcy, Are There Steps the Supported Spouse Can Take to Protect the Alimony?

A supported spouse is able to become part of the supporting spouse’s bankruptcy case in the role of a creditor. This role can be entered in multiple ways:

  • Once the supported spouse has received a bankruptcy notice, it is known that the supporting spouse has already added them as a creditor.
  • Creating a written notice with the bankruptcy court
  • Filing a proof of claim in an asset case

Once the supported spouse is registered as the creditor by the court, they will be invited to a creditor’s meeting. This is where the creditors meets with the bankruptcy trustee to talk about different options for payment terms. In the event this does not answer your questions and you need personal advice, reach out to an experienced estate planning lawyer Phoenix, AZ to ensure you are taking proper steps towards your case.

 

Thank you to Kamper Estrada, LLP for providing their insight and authoring this piece on bankruptcy and alimony.