As we explained in our last blog, child support is not dischargeable. But what if support is in the form of paying your child’s educational fees or your ex spouse’s mortgage payments on the marital home? Will those types of debts be dischargeable? Where does the court draw the line?
A determination that an obligation is in the form of alimony, maintenance or support depends on the intent of the parties at the time the divorce settlement was signed.
For example, in the case of Gianakas v. Gianakas, 917 F.2d 759 (3rd Cir. 1990)(citing H.R.Rep. No. 595, 95th Cong., 1st Sess. 364 (1977), the court determined that Paul Gianakas pay the second mortgage on his prior marital home because the divorce decree incorporated an agreement that he would “assume and pay until satisfied the second mortgage” on the marital home. Paul stopped making payments on the second mortgage and he filed a Chapter 7 Bankruptcy. Karen Gianakas, Paul’s ex wife, filed a motion in the bankruptcy court for a determination that Paul’s obligation for the second mortgage was not subject to the automatic stay because it was in the nature of alimony, maintenance or support and also not dischargeable.
The Third Circuit Court of Appeals held that whether an obligation is in the nature of support vs equitable distribution requires consideration of three factors: the language and substance of the agreement in the context of surrounding circumstances, the parties’ financial circumstances at the time of the settlement; and, the function served by the obligation. In other words, the mortgage payments were considered child support, a priority obligation that must be paid to creditors. This ruling means the mortgage payments were not subject to the normal automatic stay and must be paid.
Since that case was decided, the Bankruptcy Code has been amended and equitable distribution obligations are no longer dischargeable in a Chapter 7, however they are dischargeable in Chapter 13.
When it comes to divorce it may be best to consult with a bankruptcy attorney to protect future interests and investments. Please consult with us to help your clients understand their financial burdens. Their first consultation is free.