Dischargeability in Bankruptcy of Obligations for Alimony, Domestic Support, and Maintenance

Dischargeability of debt is one of the core principles in bankruptcy law, and it plays a large part in the “fresh start” for debtors. Discharge cancels debt and stops collection activity for the discharged debt. There are a variety of debts that are not dischargeable in bankruptcy, including alimony and child support.

Under Section 523 of the Bankruptcy Code, the first requirement for barring bankruptcy discharge of an alimony or support obligation is that the obligation must have accrued in connection with a separation agreement, divorce decree, or other court order. In addition, the obligation must actually be in the nature of alimony, maintenance, or support. Finally, the obligation must not have been allocated to another entity, although certain minor exceptions are permitted. An important point is that alimony, support, and maintenance are excepted from the general discharge automatically unless the debtor brings an adversary proceeding in bankruptcy court to challenge nondischargeability.

Under the recent Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), effective October 2005, “domestic support” was added to the Bankruptcy Code as a new debt term. This form of debt includes money owed for child support, alimony, or a money obligation incurred in the course of a divorce or separation agreement. Under the Bankruptcy Code, domestic support obligations are not dischargeable in Chapter 7, and may be relieved in Chapter 13 only under certain conditions.

The Bankruptcy Code governs the determination of dischargeability as a matter of federal law. The determination of whether the support obligation is in the nature of alimony, maintenance, or support requires the application and/or interpretation of the law of the state where the support order was entered. Such matters can become more complicated when the divorce decree and support order are issued in one state, and the bankruptcy case arises in a different state.

Property Division in Divorce: Treatment of Workers’ Compensation Benefits

Persons suffering a work-related injury may be entitled to workers’ compensation. It can be paid in installments or as a lump sum covering the costs incurred by the victim of on-the-job accident. For purposes of division in divorce, some states classify workers’ compensation as earnings. Other states treat part of such awards as earnings and part as compensation for pain and suffering resulting from the underlying injury. Under the so-called “wage replacement analysis,” some states characterize workers’ compensation as disability pay. Once classified, workers’ compensation is divided according to the respective states’ divorce property distribution schemes.

In common law equitable distribution states, the general presumption is that workers’ compensation is treated as marital property if acquired during the marriage. In pure community property jurisdictions, it is treated as community property if acquired during marriage and as separate property if it is acquired before marriage or after marriage dissolution.

Some states deal with workers’ compensation specifically. For example, Missouri sets aside a specified amount of workers’ compensation as the injured spouse’s separate property. The goal is to compensate the injured spouse for the future loss of post-divorce earnings.

In pure community property states, workers’ compensation benefits paid in a lump sum after divorce may be divided between community property and separate property. In that scenario, the portion that relates to wages lost during the marriage would go to the community estate. The rest would go to the injured spouse’s separate estate.

The individual states’ varying and evolving treatment of workers’ compensation benefits in divorces creates a patchwork system across the country. That makes it important for persons contemplating divorce in which workers’ compensation benefits are involved to consult the law in the state where the divorce will occur.

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