Property Settlement Agreements: Effect of Bankruptcy
A property settlement might be dischargeable in bankruptcy or it might not be dischargeable, depending on the facts of the case. A discharge in bankruptcy means that all of a debt or a portion of a debt no longer has to be paid because a federal court has declared the debtor to be bankrupt.
Prior to 1994, many former spouses of persons who declared bankruptcy after the divorce found themselves out of luck when seeking to collect what was due. A wife, for example, may have agreed to a divorce based on a promise from her husband that three years after the divorce, he would pay her a certain amount of money as part of the property settlement. If after the divorce was finalized, the husband declared bankruptcy, the wife might never collect the amount that was due.
Congress saw the potential unfairness of this, particularly in cases in which the debtor is technically bankrupt (owing more money than the debtor has assets), but debtor nonetheless still has the capacity to pay many debts. The new law, which took effect in 1994, allows the bankruptcy court to weigh the hardships between the parties. If it appears that the bankrupt debtor has enough property and income to pay the debt to the ex-spouse, the debtor will have to do so. If the debtor truly does not have enough money for the basic support of the debtor and his or her dependents, then all or a portion of the debt may be discharged in bankruptcy.
Although in appropriate circumstances, a bankruptcy court has the power to discharge a debt owed in a property settlement, the court cannot discharge past-due payments for alimony or child support. A debtor's bankruptcy may be a basis for reducing future alimony and child support, but not for reducing or eliminating past-due alimony and child support.
Additional information available in FindLaw's Bankruptcy & Debt section
Guide to Family Law
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