Most of us do not spend our spare time reviewing recent amendments to the US Bankruptcy Code. But if you are contemplating or going through a divorce a bit of attention is warranted because the 2005 amendments to the law change the landscape of what occurs when bad times come about.

A little history tells the story.  Twenty years ago the prevailing bankruptcy law distinguished between equitable distribution and alimony obligations. An obligation to make a payment or asset transfer as part of an equitable distribution payment or order was dischargeable.  An alimony obligation could not be avoided because it was seen as a form of support.  In the mid-1990s the statute was amended which called for a balancing of the hardship of enforcing the order against the consequence to the spouse or family member.  This balancing test was applied to both alimony and property distribution obligations.

In 2005 the Bankruptcy Code was amended again with lots of pressure from the credit card industry to limit the power of consumers to avoid obligations of all kinds.  Congress was bitten by the bug and one of the collateral effects was amendment of Section 523 to provide that any form of Domestic Relations Obligation was no longer eligible for discharge.  Section 101 states that a Domestic Relations Obligation includes debts to spouses, former spouses or children in the nature of alimony or support.  Except in Chapter 13 cases any obligation contained in a Property Settlement Agreement may not be discharged. Chapter 13 cases are essentially personal “reorganization” cases. The new statute will allow discharge of a property settlement obligation so long as it is part of a reorganization plan and is not a support obligation.

Failure to pay support obligations can also thwart a bankruptcy.  The statute permits federal courts to dismiss Chapter 13 cases or to deny discharge from debt premised upon an obligor’s failure to comply with a support obligation. The spouse who is owed the money can even ask that your Chapter 13 plan (essentially a work-out of debt) be converted to a Chapter 7 (a forced liquidation of your assets to pay creditors) premised upon failure to pay support on a timely basis.

What does this mean in practical terms?  It means that you have to watch out what you sign up for. You can sign leases, promissory notes, guaranties and credit card agreements by the bushel. At the end of the day you can pretty much avoid those obligations by filing a Chapter 7 bankruptcy or establish a work out plan through Chapter 13.  But if your obligation is to a spouse or your kids, the rules are different and those obligations are going to survive your bankruptcy.  For high income individuals, there is a tendency to overcommit because the person has a long history of significant earnings.  We commonly have client’s tell us: “I know it’s a lot of money to pay but I have always been able to make money and I will find a way to do it this time. “  Historically, we have tried to structure these deals with a heavy emphasis that the obligation is a property based one and not support with the understanding that property based obligations could be eligible for bankruptcy protection.  Since October, 2005 that technique has lost its vitality. So let the promisor beware.