Bankruptcy and Divorce: A Guide for Family Lawyers and Consumers

Will B. Geer
Partner
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Bankruptcy and Family Law: What Every Family Lawyer and Consumer Should Know

Bankruptcy can have a profound impact on family law proceedings. It’s crucial for family law practitioners—and consumers—to understand what bankruptcy can and cannot do for their clients. This guide serves as a quick reference for family lawyers and an introduction for individuals navigating both divorce and financial hardship.

Overview of Bankruptcy Chapters

Chapter 7: Liquidation and the “Fresh Start”

Chapter 7 bankruptcy is often called “straight” bankruptcy. Many fear losing everything, but Georgia law protects essential property through exemptions. Under O.C.G.A. §44-13-100, individuals may protect up to $21,500 in home equity ($43,000 if married), $5,000 in a vehicle, and $5,000 in household goods. Most cases are no-asset cases, meaning the trustee sells nothing and the debtor keeps all property.

Chapter 13: The Wage-Earner’s Plan

Chapter 13 allows repayment of some or all debts over three to five years. It’s ideal if you need to (i) catch up on missed mortgage or car payments, (ii) keep assets that might be sold in Chapter 7, or (iii) address debts like recent taxes—or discharge property settlements owed to an ex-spouse.

Chapter 11: Reorganization for Businesses and High-Income Individuals

Chapter 11 is typically used for business restructuring but can also help individuals with significant assets or income. It is more flexible than Chapter 13, though more complex. Note: property settlements are dischargeable only in Chapter 13.

The Bankruptcy Discharge

The bankruptcy discharge eliminates most pre-filing debts. However, child support and alimony are never dischargeable. Property settlements may be dischargeable in Chapter 13. If only one spouse files, the other remains liable for joint debts.

Common non-dischargeable debts include: fraud, fiduciary breaches, recent taxes, payroll and sales taxes, DUI judgments, and domestic support obligations (DSOs). Dishonesty—like hiding assets—can result in denial of discharge.

The Automatic Stay

The automatic stay under 11 U.S.C. § 362 halts most collection immediately upon filing. Exceptions allow family-related actions, such as determining paternity, custody, or domestic violence cases. Collection of DSOs from post-petition income in Chapter 7 or from retirement funds may continue—always coordinate with the trustee first.

Domestic Support Obligations (DSOs)

A Domestic Support Obligation (DSO) is any debt owed to a spouse, former spouse, or child that serves as alimony, maintenance, or support. DSOs are never dischargeable under any bankruptcy chapter.

“In the Nature of Support” — How Courts Decide

Courts look beyond labels to determine intent. If an obligation enables a spouse or child to maintain a standard of living, it’s likely support. Factors include income disparity, intent of the parties or judge, adequacy of support, and how payments are structured. Even mortgage or tuition payments may qualify as support if intended to sustain the family.

Attorney’s Fees

Attorney’s fees owed to a former spouse are usually considered support—and thus non-dischargeable. However, if awarded under a non-family statute (like a contempt proceeding), they may not be treated as DSOs.

Priority and Preference Rules

Domestic support obligations receive first priority under 11 U.S.C. § 507. Pre-filing DSO payments are not “preferences” and cannot be reclaimed by the trustee. This ensures support obligations are protected.

Protecting Support Obligations with Liens

Spouses can secure DSOs or property settlements with liens on property. Under 11 U.S.C. § 522(f)(1) and Farrey v. Sanderfoot (1991), liens created at the same time as the debtor’s new property interest in divorce cannot be avoided. This protects ex-spouses’ financial rights post-divorce.

Final Thoughts: Understanding how bankruptcy intersects with family law is essential to protecting clients’ rights—whether ensuring support survives discharge or preserving assets for a true financial fresh start.

Contact Rountree Leitman Klein & Geer, LLC to learn more or schedule a consultation.