Filing for bankruptcy in order to avoid alimony is not always the best idea. An obligation to pay spousal support, also considered a domestic support obligation, is almost always not dischargeable. The general rule is that a debt for spousal support, or alimony, cannot be cancelled or forgiven.
What is Alimony?
Alimony is spousal support after a divorce ends a marriage. The support provided through alimony, from one former spouse to the other, is usually temporary. Alimony is often arranged when a marriage involved one spouse making majority or all of the income, while the other spouse took care of the home. The “stay at home” spouse is often the recipient of alimony in a divorce.
Changing Alimony During Bankruptcy
Getting alimony payments adjusted or discharged through bankruptcy is often a daunting undertaking. The supporting spouse should list the supported spouse as a creditor. While it is difficult for alimony to be discharged, there are still a few ways alimony can be changed. If the alimony and the supported spouse are not listed on the bankruptcy petition, alimony discharge becomes nearly impossible. Debt that is not listed in a bankruptcy petition cannot be discharged in bankruptcy court.
Although alimony cannot usually be discharged in bankruptcy, there are two exceptions to this rule.
The first instance that alimony can be discharged in bankruptcy is when the payment of debt is falsely named as being alimony. If a divorce decree states that an obligation to a spouse is alimony, but the obligation is not actually alimony, then the obligation has the potential to be discharged in bankruptcy.
The second instance that alimony could be discharged is if the obligation of debt has been turned over to a third party. For example, two people get divorced and one is obligated to pay the other a certain amount per month. The person in charge of making the payments stop, therefore, the individual relying on those payments must get them from a third party. That third party now owns the right to collect the alimony from the original spouse in charge of the payments. If the spouse in charge of paying alimony files bankruptcy, the alimony obligation can be discharged to the extent it has been legally transferred to the third party.
Bankruptcy can have a huge impact on one’s ability to pay alimony. A major factor the court utilizes in order to determine spousal support payments is the supporting spouse’s ability to pay – considering their earning capacity, actual income, assets, and standard of living.
By Elspeth Crawford
When someone files for bankruptcy, they receive what is called an automatic stay. The automatic stay is a powerful tool which prevents creditors from collecting debts from the bankruptcy estate while the bankruptcy is in progress. For example, a creditor might be threatening to repossess your car because of your failure to pay a car loan, but after the automatic stay kicks in the repossession process will be stopped dead in its tracks. The purpose of the automatic stay is to give the bankruptcy debtor a break from the hounding of creditors and let them have a chance at a fresh start.
What Will the Automatic Stay Stop?
The automatic stay will protect debtors from many of the various ways creditors use to collect debts. Specifically, it will stop:
Creditors will willfully violate the automatic stay can be sanctioned with damages, costs, attorneys’ fees and, under certain circumstances, even punitive damages. Once a creditor has notice of the automatic stay, they must abide by it or face the consequences.
What Will the Automatic Stay Not Stop?
The power of the automatic stay is potent but not unlimited. There are several actions which the automatic stay will not stop. These include:
Also note that the automatic stay is designed to protect only the debtor who has filed for bankruptcy. If there is a situation where such a debtor is a co-defendant alongside someone else, only the debtor will be protected from the lawsuit by the automatic stay. There are exceptions to this rule. Specifically, if a co-defendant is so closely related to the debtor such that a proceeding against the former would affect the bankruptcy estate, say for instance if the co-defendant were a wholly owned subsidiary of the debtor, then the co-defendant may be covered by the automatic stay as well.
There are also limits on the effectiveness of the automatic stay that kick in if you’ve filed for bankruptcy before. If you filed a bankruptcy that was dismissed by the court in the 12 months prior to filing another bankruptcy, the automatic stay is good for only 30 days. If you had 2 or more bankruptcies dismissed in the twelve months prior to filing another bankruptcy, there is no automatic stay. A court could still grant you an automatic stay if you file a motion setting out why you need one, but you’ll have to fight harder for it than you would have were this your first bankruptcy.
When Will Relief From the Automatic Stay be Granted?
The automatic stay doesn’t last forever and will end when:
In certain circumstances, creditors can also request that the stay be lifted. For example, a creditor can request that the stay be lifted if the stay does not give them adequate protection in some property in which they have a significant interest. Determining whether their interest is significant enough depends on the property involved and the skill of the lawyers who are making arguments. If you decide to file for bankruptcy, it’s a good idea to retain a lawyer who can advise you on how best to make use of the automatic stay.
Chapter 11 bankruptcy allows a company to reorganize itself and remain operational while it pays back its creditors. The logic behind allowing a company to do this is that it is better for everyone to let a company keep operating and stand a chance at paying creditors back than it is to shut the company down completely.
Chapter 11 bankruptcy is not available to individual debtors. It is only available to companies, like partnerships and corporations, which are not sole proprietorships. Partnerships and corporations are likewise not allowed to file for Chapter 7 or Chapter 13 bankruptcy, which are available only to individuals or sole proprietorships. Chapter 11 bankruptcy is one of the more complicated forms of bankruptcy available to companies, and a decision to file for it should not be made lightly.
Chapter 11 Process
In addition to yourself and your creditors, there are several parties involved in the Chapter 11 process. One of them is the bankruptcy trustee, a court-appointed custodian whose job it is to form a committee of your creditors to vote on a reorganization plan.
You have the right to submit a reorganization plan for the first 120 days after the case is filed. The purpose of the plan is to lay out how your creditors will be paid back. Usually, you will pay them back out of the business’ future earnings, although some plans can include a limited liquidation of business assets. The idea is to come up with a plan that has a realistic chance of success, something which both pays your creditors something of what you owe and keeps your business operational. Unlike in a Chapter 13 plan, there is no time limit on how long the plan has to take.
The committee of creditors will have to vote on your reorganization plan. Not all have to vote for in order for it to be confirmed. If your business is a corporation, your stockholders must also agree to the plan. After it has been confirmed, the bankruptcy court will have to approve it. Even if some creditors object, the court will still approve the plan if it thinks the plan is reasonable. If the plan is approved, you will begin making the prescribed payments to your creditors. If you’re successful, you will leave the bankruptcy process with lower debts and a reorganized business.
Another player involved is the bankruptcy court, which will have the power to approve some of your business decisions. You’ll remain in control of daily transactions, but anything involving a great deal of money needs the consent of your bankruptcy trustee and the court.
Advantages of Chapter 11
A successfully filed Chapter 11 bankruptcy offers many advantages to the debtor company. Among them are:
The bankruptcy process, especially the Chapter 11 bankruptcy process, can be a complicated one. Consider consulting a business bankruptcy attorney before making the decision to file.
By Elspeth Crawford
Chapter 7 bankruptcy is a personal form of bankruptcy which, when filed, erases at least some of your debt and gives you a fresh start at building credit. Under Chapter 7, a bankruptcy trustee will look through your assets and try to sell those assets he’s allowed to sell in order to pay off your debts.
The bankruptcy trustee will use the money made from selling your assets to pay off your creditors. The order in which creditors are paid depends on the applicable state and federal laws. Past-due child support and alimony are often paid first. Wages that are owed to others may be paid next. Credit card debts will be paid last.
What happens if you have no assets to sell? In this case, many of your debts will still be erased. The Chapter 7 process tries to appease creditors as best it can, but most creditors receive little from it. Chapter 7 bankruptcies are often called “no-asset bankruptcies” for this reason.
What Debts Does Chapter 7 Bankruptcy Erase?
Chapter 7 Bankruptcy erases, or discharges, most types of unsecured debt. An unsecured debt is one that is not attached to an item of property that guarantees payment through the possibility of foreclosure or repossession. Common forms of unsecured debt include credit card bills, personal loans and medical bills. Chapter 7 will also discharge court judgments against you that do not intentional infliction of personal injury, intentional property damage, or drunk driving. If, for example, you dinged someone’s car by accident and were being made to pay for the damage, such judgment would be discharged. If on the other hand you were in an accident as a result of driving drunk, the judgment would not be discharged.
What Debts Can Chapter 7 Bankruptcy Not Erase?
There are some debts which Chapter 7 bankruptcy cannot get rid of. These include:
In some cases, a Chapter 7 debtor may choose to reaffirm, that is to renegotiate and continue to pay, a debt rather than discharge it. Debtors may want to do this if the debt is secured by some item they need, say their car, and discharging it completely would result in the item being repossessed. Under a reaffirmation, they will have the opportunity to at least negotiate new terms that may be more favorable to them.
Exemptions and Exclusions
Chapter 7 bankruptcy law does not exist to erase someone’s debt in exchange for all of their possessions. It allows debtors to retain exemptions, or a certain dollar amount of property that your trustee may not sell. For example, Chapter 7 bankruptcy allows you to keep certain amounts of equity in your car or home. Say, for example, that you own a car worth $10,000 and have paid off the car loan in the amount of $2,000. If the federal exemption for automobiles is $3,000, you get to keep the car because your equity is less than the exemption. But keep in mind that you must continue to pay the loan to keep the lender from repossessing the car.
Federal law also lists exclusions, certain property which cannot be sold through bankruptcy no matter how much it’s worth. For example, your trustee is not allowed to sell your retirement funds, annuities and certain trust funds through a Chapter 7 bankruptcy.
Both federal and state bankruptcy laws include lists of excluded property under Chapter 7. Some states' exemptions are better than the federal rules. Some are not. Some states let you choose between the federal or state exclusions, and in this case a qualified bankruptcy attorney can help you make the best decision.
After you file a Chapter 7 bankruptcy, you must wait 8 years before you are allowed to file one again. This time limit exists to prevent people from abusing the system by constantly building up debt and filing for bankruptcy whenever their creditors come around to collect.
If you are in debt and are thinking of filing for Chapter 7 bankruptcy, consult a bankruptcy attorney who can help you through the process. Most bankruptcy attorneys file Chapter 7 bankruptcy for flat, relatively affordable fees.