Effect of Bankruptcy

Depending on the facts of the case, a property settlement may or may not be dischargeable in bankruptcy. (A discharge in bankruptcy means that all or a portion of a debt no longer must be paid because a federal court has declared the debtor to be bankrupt.)

Before 1994, many ex-spouses of persons who declared bankruptcy after the divorce found themselves unable to collect what was due. For example, a wife may have agreed to a divorce based on the promise that her husband would pay her a certain amount of money over the course of four years following the divorce, as part of the property settlement. Prior to 1994, if he filed for bankruptcy after the divorce was finalized, the wife probably be unable to collect the money that was due.

Congress sought to rectify this potentially unfair situation, particularly in cases where the ex-spouse was bankrupt, but had enough money to pay off some or even many debts.  Consequently, the new law that took effect in 1994 allows the bankruptcy court to weigh the hardships between the parties. In the event that it appears the bankrupt debtor has enough property and income to pay the debt to the ex-spouse, the debtor will have to do so. However, if the debtor does not have enough money for the basic support of him/herself and his or her dependents, then all or a portion of the debt may be discharged in bankruptcy.

It should be noted that while the bankruptcy court has the power to discharge a debt owed in a property settlement, in certain circumstances, the court cannot discharge past-due payments for alimony or child support. Bankruptcy, however, may be an acceptable reason for reducing future alimony and child support, but not for reducing or eliminating past-due alimony and child support.