Are Debts For Spousal Or Child Support Discharged In A Bankruptcy?

---

You can never discharge that kind of a debt. If you owe child support or alimony, Congress has been very, very clear that you must pay it — that’s a theme that runs through the Bankruptcy Code. In fact, the top priority in the list of priority debts is a debt for domestic support. In Chapters 7, 13, and 11, those debts are not dischargeable.

When you emerge after you’ve gotten your discharge in a Chapter 7, you still owe that back child support or alimony. In a Chapter 13, you’re going to have to pay the back child support and/or alimony in full through the plan, and it’s the same in a Chapter 11, unless the spouse, former spouse, or child agrees to less favorable treatment, though that’s unlikely. Some people have come up with a scenario along the lines of: “Okay, I owe you $100,000, but if I have to pay it in full, I can’t come up with a feasible Chapter 13 plan. Would you accept $80,000 paid out over that five-year Chapter 13 plan period?” Maybe the other person will say, “Yes, I’ll accept it because it’s better than nothing since you’ve been a deadbeat parent for all these years.” It is conceivable that a spouse or a former spouse would accept less favorable treatment just to get paid something, but generally speaking, no, you’re not going to be able to discharge a debt for domestic support in any bankruptcy case.

Does The Debtor Have The Absolute Right To A Discharge, Or Can Creditors Object To A Discharge?

The debtor does not have an absolute right to a discharge. There are a couple of ways in which creditors can object, though the typical form is not actually an objection (in legal terminology we call that a contested matter), but instead a special kind of a lawsuit called an adversary proceeding. In the proceeding, the creditor can challenge the discharge of a particular debt under a theory of fraud, or breach of fiduciary duty, which does include embezzlement and larceny, or willful and malicious harm to a person or property. Willful and malicious harm to property, however, is dischargeable in a Chapter 13 — yet another example of that super discharge in a Chapter 13.

Another way is to challenge the entire discharge, which, again, the creditor can do using an adversary proceeding. Generally speaking, the theories used in that kind of challenge include the debtor engaging in fraud on the court, hiding assets, or engaging in fraudulent transfers prior to filing. Fraudulent transfers are transfers of assets that shield them from the legitimate depredations of creditors, or transfers for less than a reasonably equivalent value in exchange for the transfer. So, yes, creditors can oppose a discharge, and if they’re successful, the debtor gets no discharge at all.

Generally speaking, if someone comes into my office and says, “I’d like to file a bankruptcy case. Here’s what’s been going on,” I might respond that our better bet would be to work something out through prebankruptcy planning or negotiations if it looks like there won’t be a discharge on the horizon because the debtor has engaged in malfeasance.

Most of the grounds for denying discharge come as a result of behavior that takes place after filing the bankruptcy petition. If it looks like I’ve got a debtor who struggles with integrity issues, I’m going to really lean on them to get their behavior under control once we file the case. But there can be a ground for not getting a discharge because of prepetition behavior, which is behavior prior to filing the bankruptcy petition. The obvious example in the Bankruptcy Code is in a Chapter 7 (Section 727 is the section under which you get a Chapter 7 discharge). One of the things that can be used to deny a discharge is if, during the one-year period immediately prior to filing the bankruptcy petition, the debtor engaged in fraudulent transfers (i.e., transferred assets with the intent to hinder, delay, or defraud the creditors). In that case, the debtor is not eligible to get a Chapter 7 discharge.

Nevertheless, there are a couple of things that we can do in a situation like that. One, of course, is simply wait beyond the one-year mark, though the fraudulent transfers will still create problems because the Chapter 7 trustee assigned to the case will seek to undo those fraudulent transfers, and recover the assets for the benefit of the bankruptcy estate and, ultimately, for the creditors. The better approach, and one that is captured in the Ninth Circuit Court of Appeal’s case called In re Adeeb, would be to undo those fraudulent transfers, get the assets back into your name, and to whatever extent possible, exempt them, all prior to filing the bankruptcy papers. You might lose some of the assets, but at least you’d be able to get a discharge, versus not undoing those fraudulent transfers and being rendered ineligible for a Chapter 7 discharge.

In other chapters, creditors can object to discharges typically due to some sort of postpetition fraud on the court, such as some kind of malfeasance.

For more information on Tax Debts in California, a free 20 Minute Phone Strategy Session is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.