Monday, December 28, 2009

When is Alimony as Defined by the Divorce Court Not Deemed Alimony by the Bankruptcy Court

Family law attorneys must continuously strive to keep abreast of the most current case law.  Similarly, family law attorneys must hone their drafting skills so that divorce pleadings and settlement agreements reflect the ever-changing case law. 

The intersection of bankruptcy law and family law is one substantive area that family law attorneys must stay abreast of the recently developments.  Below is a bankruptcy case you should read.  The family law attorney had drafted a settlement agreement that designated as "indirect alimony" the ex-husband's obligation to pay mortgage and car obligations on behalf of the ex-wife.  This settlement agreement was approved by the divorce court prior to the bankruptcy case being filed.  Nevertheless, the bankruptcy court later rejected the designation.  By rejecting the designation, the bankruptcy court effectively changed a non-dischargeable "alimony" obligation into a dischargeable property division obligation.

In re McCollum, 415 B.R. 625 (Bankr. M.D.Ga 2009). Debtor was a party to a divorce proceeding in state court prior to filing a chapter 13 bankruptcy case. Debtor was not represented by counsel in the divorce case. Ultimately, the divorce court approved a settlement agreement that created various domestic and non-domestic support obligations, including debtor's obligation to pay the mortgage on the home surrendered to the debtor's ex-spouse and pay the car loan on the car surrendered to the debtor's ex-spouse. Importantly, the settlement agreement indicated that the debtor's duty to pay the mortgage and car loan were "indirect alimony" obligations. Nevertheless, debtor's ex-spouse contacted debtor and requested that debtor NOT list the mortgage and car loan payments as "alimony" expenses on debtor's tax return since debtor's ex-spouse did not intend to claim the mortgage and car payments as "alimony" income.

Debtor filed a chapter 13 case after the divorce court entered judgment. Thereafter, debtor filed an adversary complaint seeking a determination regarding the dischargeability of divorce related debt. Debtor-plaintiff conceded that the majority of the ongoing payments under the divorce settlement agreement are excepted from discharge as domestic support obligations pursuant to Section 523(a)(5). Nevertheless, debtor-plaintiff filed the adversary proceeding to determine the dischargeability of debtor's obligation to pay the mortgage debt and the car loan, contending that these obligations are non-domestic support obligations pursuant to Section 523(a)(15).

The McCollum court noted that Section 523(a)(15) applies to debts that do not fall within the definition of a domestic support obligation but were, nevertheless, incurred by the debtor in the course of divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record. For expediency, debts under Section 523(a)(5) are generally referred to as being in the nature of alimony or support, while debts under Section 523(a)(15) are referred to as being in the nature of property division. Therefore, the court determined that the key issue to be determined was whether the mortgage and car payment obligations at issue were nondischargeable domestic support obligations within the scope of Section 523(a)(5) or property division obligations within the scope of Section 523(a)(15).

Whether or not the debts at issue are in the nature of support or property division is a question of federal law that is guided by reference to state law. In making a decision, the court must look beyond any labels used by the parties and instead determine whether at the time of its creation the parties intended the obligation to function as support or alimony. Factors relevant to this inquiry include: the language of the divorce agreement; the relative financial positions of the parties at the time of the agreement; the amount of property division; whether the obligation terminates on the death or remarriage of the beneficiary; the number and frequency of payments; whether the agreement includes a waiver of support rights; the obligation can be modified or enforced in state court; and whether the obligation is treated as support for tax purposes.

The McCollum court determined that the mortgage and car payment obligations were dischargeable in chapter 13 bankruptcy because these obligations were deemed property division obligations and not alimony or support payment obligations. Citing many factors, the court focused mainly on the following: the parties' relative financial positions at the time of the divorce, the fact that debtor was not represented by counsel and the fact that debtor's ex-spouse contacted debtor and requested that the obligation payments not be classified as "alimony" on IRS tax returns.
Warmest Regards,

Bob Schaller

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By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm
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