Bankruptcy & Divorce

Bankruptcy & Divorce

By Carl O. Graham

debt, bankruptcy

Types of Bankruptcy

For individuals, there are two primary types of bankruptcy:

  • Chapter 7 Liquidation, in which a Trustee is appointed to collect all of the debtor's non-exempt property, which is then liquidated, and the proceeds paid to the creditors. Any remaining debts are then discharged entirely, so the debtor has a fresh start. This "complete bankruptcy" is the most common type, and the process typically takes 3-4 months.
  • Chapter 13 Restructuring, in which the debtor restructures his/her debt by submitting a repayment plan to the Court (often 10 cents on the dollar) for payment over 3-5 years. Since this type of bankruptcy does not involve liquidating the debtor's assets, it is harder to qualify for (e.g. the debtor's unsecured debts cannot exceed $250,000, and the secured debts cannot exceed $750,000). Assuming the debtor complies with the repayment plan, any debts paid off in full or in part are then discharged.

What is a "Domestic Support Obligation"?

For purposes of bankruptcy, it's important to understand the term domestic support obligation, because such debts will be excepted out of most protections which a debtor has under the bankruptcy code. In short, pursuant to 11 U.S. Code § 101(14A), a domestic support obligation means a debt, plus interest, which is:

  • Owed to, or recoverable by, either a governmental entity, or a spouse, former spouse, child, child's guardian, parent or other relative
  • In the nature of child support or maintenance/alimony
  • Established by a court order, separation agreement or parenting plan
  • Not assigned to a non-governmental entity for collection.

In plain English, if the debtor has child support or alimony arrears, those debts are a "domestic support obligation". But payments to offset a disparity in how the marital estate was divided (i.e. a property equalization payment) are not a domestic support obligation. And whether a debt is protected by this provision is a matter of federal law, not state law.

If the purpose of a payment was to support the other spouse/child, then it would be a domestic support obligation, even if the payment was owing to a third party.

Automatic Stay

Upon filing a bankruptcy petition, an automatic stay goes into effect which prevents most collection actions against the debtor, however, there are exceptions which are important for family law: actions to establish paternity, start a dissolution, and to establish or modify a maintenance or child support obligation. 11 U.S. Code § 362(b)(2)(A).

But note one important aspect of family support - the Colorado family law court can establish a support order, but not necessarily enforce it while bankruptcy is proceeding. Pursuant to §362(b)(2)(B), the stay only permits property which is NOT part of the bankruptcy estate to be attached for family support obligations. In the context of a Chapter 7 bankruptcy, this means the list of exempt property described above, plus and post-petition earnings.

With a Chapter 13 bankruptcy, no enforcement action to collect family support obligations is permitted while the bankruptcy is pending.

Discharge of Debts

While the automatic stay restricts or prevents the enforcement of family support obligations while the bankruptcy is pending, the debtor's relief is only short-lived. Among the list of obligations which cannot be discharged in bankruptcy are:

  • Child Support & Maintenance Obligations ("Domestic Support Obligation"). 11 U.S. Code § 523(a)(5). Non-dischargeable in Chapter 7 or Chapter 13.
  • Property Settlement, and other divorce obligations to a spouse, former spouse, or child. 11 U.S. Code § 523(a)(15). Non-dischargeable in Chapter 7 only, which means it could be dischargeable in a Chapter 13 restructuring.

Exempt Property

If a debtor files for Chapter 7 bankruptcy, Colorado law provides that certain property is exempt from liquidation. If the debtor owns a home, then $60,000 of the equity is exempt (the "Homestead Exemption"), pursuant to C.R.S. 38-41-201.

Additionally, under C.R.S. 13-54-102, several items of property are exempt from liquidation. The more common ones are:

  • Clothing, up to a value of $1500
  • Watches & jewelry, up to a value of $2000.
  • Photographs & books, up to a value of $1500.
  • Burial Sites for the debtor plus each dependent.
  • Household Goods, up to a value of $3000.
  • Food & Fuel, up to a value of $600.
  • Military Retirement
  • Vehicles or Bicycles, up to a value of $5000 ($10,000 if elderly or disabled)
  • Life Insurance Cash Surrender Value, up to $50,000.
  • Personal Injury Claim Proceeds.
  • IRA, 401(k) or pension plan
  • Child Support or Maintenance Payments received.

For a complete list of exempt property, together with statutory references, see this handy chart on  www.coloradobankruptcy.com. Note that the chart's citations are accurate, but the values contained in the chart may be a bit out of date.

Do You Need a Family Law Attorney in Colorado Springs?

This article is a brief overview of how bankruptcy may impact your family law case, and not a complete primer on bankruptcy. Our firm pracrices family law exclusively, not bankruptcy, so please consult with a bankruptcy attorney about the facts of your case for specific guidance. The family law attorneys at Graham.Law have years of experience helping clients through the Colorado legal system. We know Colorado family laws, inside and out, from divorce to legal separation, from annulments to military divorce issues. For more information about our El Paso County family law firm, click on:

Colorado family law is all we do. Period.

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Assets & Debts
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Misc Topics