A Just Distribution of Property: Domestic support obligations

I wrote a post on the Kentucky Bankruptcy Law blog about how equitable distributions as a result of divorce are treated in a Chapter 13. You can read that post here. In short, a domestic support obligation that arises from the distribution of property will be treated as a general unsecured debt in a Chapter 13. This creates a quandary for settling matters, especially in this market where houses (the major asset that is divided up in a divorce) take so long to sell.

If there is a major asset, like a house, that has equity to be divided and one party wants to hold onto it or control its sale, one strategy is to realize that equity through debt. This can be done two ways. The simplest way and best way is the party holding onto that asset to take out a loan for the amount of equity owed and give that upfront to the other spouse. That used to be easier to do, but with dropping real estate values, obtaining a loan, even a secure one, could be difficult or impossible.

A second approach would be for there to be a promissory note from the spouse keeping control of the asset to the other party and secure that loan against the property. While this is not as good as having cash in hand, it is far better to have a secured debt going into a Chapter 13 than just an unsecured domestic support obligation that can get discharged. Since it is likely a junior lien on the property, then it could still not be paid in full, but the chances are at least better.

Domestic Support Obligations and Bankruptcy

Bankruptcy of an ex-spouse after the entry of a divorce decree (the dissolution of a marriage) can have substantial implications of obligations owed by that ex-spouse to you.  I’ve written a post regarding domestic support obligations in Chapter 7 as compared to Chapter 13 bankruptcy and I encourage your to click over and read it since I am not going to go into details here.  What I do want to reiterate here is that it is important to know how child support, alimony (maintenance) and equitable distributions of assets are treated in bankruptcy.  

In order to insure you do not end up getting paid only a percentage of what is owed to you from distribution of marital assets, be sure to get your share of assets right away rather than allowing for payment over time.  The most common example is where one party wants to keep the marital residence after the divorce is final.  They agree, then, to pay their soon to be ex-spouse a set number of dollars of the equity of the house over time in exchange for retaining the house.  Later they go into Chapter 13 bankruptcy and suddenly, you only get 10% or less of what’s owed to you and they get to keep the house. 

As hard as it may be, the more financially sound thing to do is to insist of the property being sold or refinanced and realize your share BEFORE ever quitting your interest in the property.  Also, just because something is called “child support” or “alimony” does not make it non-dischargeable.  The bankruptcy court can make its own determination based on the facts of the case as to whether it is actually an equitable distribution of property under the guise of alimony or child support, so it is risky to try and realize your share of equity by increasing child support or getting alimony.