Discharging Family Debt in Bankruptcy

February 23, 2011

Consider the following example:

 Tom and Becky Sawyer get a divorce. They have no children and Tom and Becky each have identical incomes (Tom is an aspiring riverboat captain and Becky owns a seamstress business). Tom and Becky are joint owners of a 2008 Pontiac GTO which they own outright, and they have $20,000 in joint credit card debt. Becky agrees to sign over the GTO to Tom in exchange for Tom paying the credit cards. The family court judge (Judge Thatcher, of course), orders that Tom will hold Becky harmless for any nonpayment on the credit cards. Later Tom is fired from his riverboat captain job (it wasn’t his fault – honest!) and is unable to pay the credit cards. Poor Tom sold the GTO and is now considering bankruptcy to discharge his debts.


Tom and Becky’s situation is fairly common and causes quite a bit of confusion in real life. First, Becky is still obligated to the credit card companies despite Judge Thatcher’s decree. Briefly, this is because the credit card companies were not parties to Tom and Becky’s divorce, so the legal relationship between Becky and the card companies did not change.


Second, Tom is able to discharge his debt to the card companies through either Chapter 7 or Chapter 13, but he cannot discharge Becky’s obligation to pay this debt because Becky did not file bankruptcy.


Finally, while Tom can discharge his obligation to the credit card companies, there is a second obligation: Judge Thatcher’s order that he hold Becky harmless if he fails to pay the credit card debt. When Tom does not pay the credit card companies, Becky can ask Judge Thatcher to enforce the hold harmless order against Tom.


Whether Tom can discharge the hold harmless order in bankruptcy depends on whether the debt and the hold harmless clause constitute a "Domestic Support Obligation" that is in the nature of “alimony, maintenance, and support.” A Domestic Support Obligation cannot be discharged, but the bankruptcy filing may stop collection actions such as wage garnishment, bank seizure, or even jail for contempt of court; and a Chapter 13 may provide time to repay support money owed to a spouse, former spouse, or child.


A debt not in the nature of “alimony, maintenance, and support” is commonly referred to as a "property settlement." If Tom’s obligation to pay the credit card companies is a property settlement, then the hold harmless clause can be discharged at the end of a Chapter 13 bankruptcy, but cannot be discharged in Chapter 7.


Determining whether the debt is a "Domestic Support Obligation" or a "property settlement" depends on specific facts and requires the careful consideration of an experienced bankruptcy attorney. Call today for assistance and learn how the Federal Bankruptcy Code can help your debt problem.

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