Are Spousal Support Payments Dischargeable in Bankruptcy?

Are Support Payments Dischargeable in Ohio?

A dischargeable debt is one that can be eliminated during bankruptcy, meaning that you are no longer required to pay it off. However, some debts are non-dischargeable, meaning that you will be responsible for them in full, even after bankruptcy. Under 11 USC § 523(a)(5), payments for spousal support are deemed a non-dischargeable debt, but what exactly constitutes a support payment is not always clear. The case of In re Norbut, explained below, sheds some light on this subject.

In re Norbut

In the case of In re Norbut, 387 BR 199 (S.D. Ohio 2008), the plaintiff-creditor, Theodore Norbut, was suing the debtor-defendant, Margaret Norbut, in order to ensure that he could collect on a debt that she owed to him. Margaret and Theodore were divorced, and as part of the divorce Margaret was to receive alimony from Theodore for 15 years leading up to his retirement, and then she would begin receiving alimony payments out of Theodore’s pension.

However, things got a bit dicey when Theodore accepted an offer for early retirement. As a result, Margaret was now receiving two alimony payments: the original payment that she was entitled to for the 15 year period; and now, in addition, the payment from Theodore’s pension.

Theodore then took Margaret to court, arguing that she was not supposed to receive the double payments. The dispute lasted for ten years, but eventually the court ruled in Theodore’s favor and ruled that Margaret owed him all of the extra alimony that she had been receiving over the years. The total debt that Margaret owed to Theodore was $72,000.

Margaret Files Chapter 7

Margaret then fell on hard times, due in part to her sudden lifestyle improvements using the extra alimony, and eventually filed for Chapter 7 bankruptcy. During the bankruptcy, Margaret sought to have her debt to Theodore discharged. However, Theodore, as her creditor, objected to the court discharging the debt. Theodore argued that the debt owed to him was a support payment, which is non-dischargeable under 11 USC § 523(a)(5).

How Can I Know When a Debt is for Support?

Not all support payments are simply labeled “support payments,” and thus it can sometimes be unclear what exactly constitutes support. For this reason, bankruptcy courts have fashioned a four-part test to determine if a payment is actually a support payment, and also whether that payment is dischargeable.

Factors 1 and 2:

The first factor of the test merely asks whether the parties intended to create a support payment. The second factor is closely entwined with the first, and asks whether the payment actually functions as necessary support. These two factors are similar because the same analysis is used to assess both. The court looked at the financial position and lifestyle that the parties lived while married, and also at the lifestyle they lived after divorce. During their marriage, they lived a moderate, middle class lifestyle. After their divorce, both parties’ lifestyles declined. However, as soon as Margaret began collecting the second alimony payment from Theodore’s pension, her lifestyle improved dramatically, while Theodore’s declined to the level of poverty. Because Margaret’s lifestyle had become so lavish while Theodore struggled to make ends meet, the court determined that Margaret’s debt was intended for support, and was also necessary for support, thus satisfying the first two factors.

Factors 3 and 4:

The third factor requires the court to analyze whether the amount of the support payment is unreasonable in the sense that it is more than what is required for support. The fourth factor is dependent on the third, and merely instructs the court that if the payment is excessive, then the debt is dischargeable. If it is not overly excessive, then it is non-dischargeable. The court noted that it is rare to find a support debt dischargeable, and accordingly respected the decision of the Ohio State Courts to award Theodore the $72,000. Thus, the court ruled that the support payment was not excessive under the third factor, and therefore non-dischargeable under the fourth.

Conclusion

Because the court determined that the payment was for support, Margaret’s debt to Theodore was held non-dischargeable, and thus she is responsible for the entire $72,000. Courts are very reluctant to discharge a support payment, which emphasizes how important courts classify such payments. The goal of bankruptcy is to provide the debtor with a fresh start, but bankruptcy law also seeks to protect creditors, especially those who are reliant on a support payment for their everyday livelihood. In re Norbut demonstrates this exactly.

If you are divorced and are involved in bankruptcy, or otherwise receiving support payments from someone who is, you need to know what your rights are. To protect your interests, you should consult an experienced bankruptcy attorney who can help you explore your options.

To schedule a free consultation with a Dayton bankruptcy protection lawyer, contact Cope Law Offices, LLC.

Image from Flickr user meddygarnet