Distinguishing Domestic Support Obligations from Property Settlement Debts: Comparative Opinions

By: Donald L Swanson

Domestic support obligations (e.g., alimony and child support) cannot be discharged in a Chapter 13 bankruptcy.

Property settlement debts, by contrast, may be discharged in Chapter 13.

Question and an Illustration Answer

Question:  What distinguishes a domestic support obligation from a property settlement debt in Chapter 13?

Two recent opinions out of South Dakota’s Bankruptcy Court address that question.  These are companion opinions, issued about a month apart and authored by the same Bankruptcy Judge (Hon. Charles L. Nail, Jr.).  A comparison of these two opinions illustrates the distinction.

Legal Standards

In both opinions, Judge Nail applies the following legal standards.

–Statutes

These statutory provisions define and give meaning to a “domestic support obligation”:

• “Domestic support obligation” is defined by 11 U.S.C. § 101(14A) as a debt that is:

(A) owed to or recoverable by—a spouse, former spouse, or child of the debtor . . . ; (B) in the nature of alimony, maintenance, or support . . . without regard to whether such debt is expressly so designated; (C) established . . . [under]— (i) a separation agreement, divorce decree, or property settlement agreement; (ii) an order of a court of record; . . .

• A debt for a “domestic support obligation” cannot be discharged, under 11 U.S.C. §§ 1328(a)(2) and 523(a)(5), while property settlement debts may be discharged in Chapter 13.

–General Observations

Here are general observations from Judge Nail on deciding whether a debt qualifies as a domestic support obligation, as opposed to a property settlement debt, for purposes of discharge:

• The party asserting that a debt is a domestic support obligation bears the burden of proof by a preponderance of evidence;
• The function the award was intended to serve is crucial;
• This is a question of federal bankruptcy law, not state law;
• The state court’s characterization of the claim is a starting point but is not binding;
• Discharge exceptions for spousal and child support deserve a liberal construction; and
• The policy underlying a § 523 discharge favors enforcement of familial obligations over a debtor’s fresh start.

–Factors to Consider

Jude Nail identifies these six factors for determining whether a claim is a domestic support obligation for Chapter 13 discharge purposes:

1. language and substance of the agreement in the context of surrounding circumstances;
2. relative financial conditions of the parties at the time of divorce;
3. respective employment histories and prospects;
4. which party receives the marital property;
5. periodic nature of payments; and
6. difficulty for a former spouse and children to subsist without the payments.

First Opinion

The first opinion is Winter v. Winter, Adv. No. 18-4008, dated May 14, 2019 (Doc. 22). Here’s a summary.

–Facts

Plaintiff and the Chapter 13 Debtor are former spouses. Plaintiff (former wife) files, (i) a proof of claim for $130,000.00 in Debtor’s bankruptcy, and (ii) a complaint to determine that her claim is a domestic support obligation that cannot be discharged under 11 U.S.C. §§ 1328(a)(2) and 523(a)(5).

Debtor argues that Plaintiff’s claim arises from a property settlement, does not qualify as a domestic support obligation, and should be discharged in his chapter 13 case.

–Issue

The single issue in the case is this: Whether Debtor’s debt to Plaintiff qualifies as a “domestic support obligation.”

–Ruling and Rationale

Judge Nail determines that Plaintiff’s claim is “in the nature of support” and “cannot be discharged in Debtor’s chapter 13 case.” Here’s a summary of his analysis.

• “Foremost,” Plaintiff’s monthly gross income is “insufficient to support her and the couple’s four children”: e.g., (i) Plaintiff had to accept $100,000.00 in financial support from her parents, and (ii) payment of Debtor’s debt “would have ameliorated her financial struggles.”
• Their divorce stipulation, (i) focuses on providing financial protection and stability for Plaintiff and her children, and (ii) does not identify or divide any jointly held assets.
• Debtor specifically waives alimony or a division of property in the divorce, but Plaintiff does not.
• Debtor’s income, at the time of divorce, is more than twice Plaintiff’s income, and the funds in question would have reduced that disparity.
• Debtor must pay their children’s post-secondary education expenses, because Plaintiff would not be able to do so.
• While post-divorce documents and communications refer to the debt as a property settlement, the divorce stipulation does not: it identifies the debt as an “assignment of property,” not a division of assets.
• Two circumstances suggest a contrary result but do not “balance the scale”: (i) neither party treated Debtor’s payments as alimony for tax purposes, and (ii) Debtor was to pay the amount in question on a date certain, not periodically.

Second Opinion

The second opinion, by contrast, is Bussiere v. Bussiere, Adv. No. 19-5002, dated June 21, 2019 (Doc. 15). Here’s a summary.

–Issue and Background

Debtor is in a chapter 13 case, where her former husband asserts a non-dischargeable $8,230.28 “domestic support obligation” under 11 U.S. C. § 523(a)(5).

Here’s how the claim arose.

• Debtor seeks a child custody modification so she can relocate for a new job—her former husband resists.
• They incur child custody evaluation costs and attorney fees, but Debtor ends up staying put. So, former husband seeks a reallocation of evaluation fees and an award of half his attorney fees.
• The divorce court orders Debtor to pay former husband’s half of evaluation costs and a portion of his attorney fees, for a total of $8,230.28.

–Ruling

Judge Nail rules that the $8,230.28 claim, (i) is not a domestic support obligation, and (ii) may be discharged, if and when Debtor has a plan confirmed and completes her plan payments.

–Evaluating the State Court’s Order

In reaching his ruling, Judge Nail provides this analysis of the state court’s order.

• The state court clearly considered each party’s strained financial situation; but it was Debtor’s disputatious conduct that led the state court to order the payment of $8,230.28.
• The state court’s attorney fee framework consists of, (i) considering what constitutes a reasonable fee, (ii) deciding what portion of the fee, if any, should be allowed as costs to be paid by the opposing party, (iii) considering the property owned by each party, their relative incomes, and whether the property of the parties is in fixed or liquid assets, and (iv) considering whether the actions of either party unreasonably increased the time spent on the case.
• The state court considered each party’s financial wherewithal: e.g., former husband had a higher household income than Debtor and some rental income, but neither party had a positive net worth.
• The state court focused on Debtor’s unreasonable actions: e.g., (i) Debtor’s proposed parenting plan was “outside the standard guideline” and “not reasonable,” (ii) Debtor “only took her best interests into consideration and did not take the children’s best interests into consideration,” (iii) a mediation effort was unsuccessful because Debtor “was a reluctant participant,” and (iv) Debtor’s conduct “unreasonably and unnecessarily resulted” in significant evaluation costs and attorney’s fees.
• Ultimately, the state court, (i) decided to award only a portion of the attorney fees requested because former husband was “in a better economic position to bear the cost of litigation,” and (ii) ordered Debtor to reimburse his half of the evaluation costs.

–Factors Applied

When considering the factors for a domestic support obligation identified above, Judge Nail finds that “none tip” in favor of a domestic support obligation:

• The state court’s award of $8,230.28 is clearly based on Debtor’s conduct in the state court action;
• The respective financial conditions and employment histories of the parties are similar;
• Child custody modification actions do not encompass a division of property;
• The award of attorney fees is a one-time award, not periodic in nature; and
• Former husband and his family are able to subsist without the award.

Conclusion

A domestic support obligation is “in the nature of alimony, maintenance, or support” and is not dependent on “whether such debt is expressly so designated” (11 U.S.C. § 101(14A)).

Consequently, uncertainty can exist on whether a particular obligation under a divorce decree qualifies as a domestic support obligation or a property settlement debt.

A greater understanding of that distinction can be found by comparing and contrasting Judge Nail’s ruling and rationale in each of the companion cases described above,

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