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Scura, Wigfield, Heyer, Stevens & Cammarota Blog

Dischargeability of Equitable Distribution in Chapter 7 and Chapter 13

[fa icon="clock-o"] August 3, 2017 [fa icon="user"] Christopher J. Balala [fa icon="folder-open'] Bankruptcy, Chapter 7

balance scalesThe chapter of bankruptcy that an individual files is extremely important.  There are several different chapters of bankruptcy and each has a set of rules and laws that govern them.  If the incorrect chapter of bankruptcy is filed, it may not be easy to change between chapters without yielding an objection from a creditor or the trustee.  In addition, there may be additional fees and/or  legal expense to get into the correct chapter. 

Many clients come to the firm after a divorce.  They are strapped with additional expenses for child support, alimony, and any other debts that they are to take on from the dissolution of their marriage.  Many marital homes are divided as well as pensions/retirements and any other marital assets.  Post-martial obligations can be split into two categories: support and equitable distribution.  Equitable distribution is a method of dividing property at the time of divorce. 

All states except for Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin follow the principles of equitable distribution.  A court will only engage in equitable distribution if a divorcing couple is unable to negotiate a property settlement.  If a couple is able to agree on how to divide a portion of their estate, but not the entire estate, the state court will step in to distribute the undivided portion.  This blog addresses equitable distribution and the question of dischargeability of such distribution in the context of a post-divorce bankruptcy filing.  

Chapter 7

In general, all scheduled unsecured debts are discharged in a bankruptcy case.  There are, however, enumerated debts which are non-dischargeable.  Obligations to pay alimony, maintenance and support, for example, cannot be excused.  Child support, alimony, and equitable distribution are all considered Domestic Support Obligations (“DSOs”).  Normally, a DSO cannot be discharged. 

In a Chapter 7 proceeding an equitable distribution obligation is excepted from discharge under 11 U.S.C. §523(a)(15).  Section 523, entitled Exceptions to Discharge, enumerates certain kinds of debts that are considered nondischargeable.  Keep in mind that depending on the subsection of §523 a creditor may or may not have an obligation to seek court intervention to determine whether their debt falls with the ambit of a subsection of §523.  Section 523(a)(5) excepts from discharge, “domestic support obligations.”  Section 523(a)(15) excepts from discharge, debts “to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) 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 of record, or a determination made in accordance with State or territorial law by a governmental unit.”     

Chapter 13

In contrast, a Chapter 13 debtor can discharge such a debt.  “Pertinently, §1328(a) provides that upon completion of the debtor’s plan, the court shall grant the debtor a discharge of all debts treated in the plan.”  In re Kim St. Clair, 2011 WL 6888369, 08-27884 (MBK) (Dec. 29, 2011, J. Kaplan).  Section 1328 applies to chapter 13 bankruptcies only.  Therefore, any debts in the nature of equitable distribution are subject to a Chapter 13 discharge under §1328(a).  The rationale is that because section 1328(a) specifies that debts incurred pursuant to §523(a)(1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) are excluded from discharge, but makes no mention of §523(a)(15), then such debts can be discharged upon successful completion of a chapter 13 bankruptcy. 

Conclusion

If you are seeking to discharge a family law obligation in bankruptcy, retaining a competent bankruptcy attorney is crucial.  The decision on which chapter of bankruptcy to file can determine whether or not the obligation is dischargeable.  If you are unsure of your rights, please give us a call for a free consultation.  We have office locations in Wayne, Hoboken, Newark, and Hackensack.

Schedule a Free Bankruptcy Consultation Today!

Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.

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