New Bankruptcy Act Will Affect Divorce Litigation
The 2005 Bankruptcy Abuse Prevention and Consumer Act becomes effective October 17, 2005. The Act makes several very important changes in the Bankruptcy Statutes as they apply to divorce litigation.
Significant changes are made in the new law which affect property settlements, alimony and child support payments, or alimony and child support arrearages. The most significant change is that payment obligations under a property settlement agreement or divorce judgment are no longer dischargable in bankruptcy.
Previously, the Bankruptcy Court was compelled to make a determination as to whether equitable distribution or property settlement payments were "in the nature of support" or purely property settlement obligations. The determination of that issue led to delays in the payment of property settlement obligations and a great deal of costly litigation to determine the "true nature" of such obligations.
The new Act eliminates that "how many angels are on the head of the pin" distinction by providing that no property settlement obligation is any longer dischargable in a bankruptcy proceeding. The new Act also elevates alimony and child support obligations to a number one priority level in a bankruptcy proceeding. They are now given a priority raising them above even tax claims. The Act also prevents a debtor from obtaining ANY bankruptcy relief unless all past due alimony or child support claims are paid in full.
This reform is long overdue and will prevent disgruntled obligors under state divorce court judgments from voiding or delaying payment of their agreed upon or court ordered obligations.
It use to be that in some divorce cases, lawyer will tell their client to also file for bankruptcy to protect them from the other spouses inability to pay bills that are awarded them in the divorce. How does the new law affect this?
If have a docketede pending divorce case and I file bankruptcy chapter 13,will my wife's financial records be requested and audited?
Cheryl - in an appropriate case, it may be advisable to file a Petition in Bankruptcy. However, we could not advise you to do so or not do so. You should only make that determination after meeting with your lawyer and reviewing the details of your case.
Larry - the scope of discovery varies from case to case. You should consult with your divorce and/or bankruptcy attorney.