Alabama Bankruptcy Lawyer Blog

Having never done much domestic relations work, I don't have much contact with dischargeability issues from a debtor's perspective. We all remember from a seminar that BAPCPA created an animal known as the "domestic support obligation" ("DSO"), and generally made liabilities in divorce situations, or DSO's, more difficult to avoid. This week, however, I had an inquiry that required a little research into the post-BAPCPA treatment of DSO's in Chapter 13 cases. At the risk if displaying my ignorance, there appears to be a difference in Chapter 13 and 7 with respect to DSO's.

In Chapter 13, the plan is subject to confirmation if it complies with the requirements of Section 1325. Among those requirements is the payment of any claim entitled to priority treatment under Section 507. Pursuant to 507(a)(1)(A), a DSO is entitled to priority treatment. Accordingly, if the plan is confirmed, and the debtor owes something from a divorce settlement or decree that does not qualify as a DSO (example, an obligation to pay attorneys fees), the plan does not have to pay it in full. Only those obligations within the definition of a DSO are entitled to priority.

Of course, the Chapter 7 discharge excludes DSO's from discharge under Section 523(a)(5). But in a bit of a catch-all provision, 523(a)(15) also excepts from the Chapter 7 discharge certain obligations owed to a spouse, former spouse or child of the debtor, that are not within the DSO definition. The language is broad, and basically covers any obligation to pay pursuant to a separation or divorce agreement that is incorporated into a state court decree. A common example that comes to mind is attorney's fees and the obligation of one spouse to pay and hold harmless on marital debts. In Chapter 7, the exception from discharge is accordingly broader. In Chapter 13, you don't have to pay the 523(a)(15) obligations to get a discharge.

Moral of the story? If you want an obligation to be non-dischargeable, you better make sure it qualifies as a DSO. In general terms, this means it must be in the nature of alimony, support or maintenance. Otherwise, he (or she) files Chapter 13 and only has to pay the claims that qualify for priority because they are DSO's. Anything else is a general unsecured claim. When in doubt, and if you are negotiating a settlement agreement, buy a little time with a bankruptcy attorney. If not, and the judge is writing the decree, just give some thought to how your evidence is presented. It's not enough for the judge to call it alimony, support or maintenance. Your evidence should point in that direction.

Not according to the Fifth Circuit, applying Louisiana law to determine the meaning of "property" or "interest in property." Here's the short version of the facts in In re Laughlin, 602 F.3d 417 (5th Cir. 2010).

On June 4, 2007, debtor completed a procedurally proper pre-petition disclaimer of any interest in his father's estate. On July 21, 2007, he filed Chapter 7. The trustee filed an AP seeking denial of discharge on the grounds debtor's renunciation was a transfer of property made within one year of bankruptcy with the intent to delay, hinder or defraud creditors. The Bankruptcy Court agreed, applying the rationale of the U. S. Supreme Court in Drye v. United States, 528 U.S.49, 120 S.Ct. 474, 145 L.Ed. 2d 466 (1999)(holding that a disclaimed interest was "property" subject to IRS liens). The District Court affirmed. The 5th Circuit, however, saw it differently, finding Drye inapplicable.

The issue, in a nutshell, is whether the disclaimer of an inheritable interest operates as a "transfer" of "property" or a "property interest." If there was no transfer of property or a property interest, that is the end of the discussion. Now, the question of whether a transfer has occurred is one of federal law, since the applicable statute defines "transfer." That part is easy enough. The difficulty arises, however, in defining "property" or "property interest" since neither is defined in the Bankruptcy Code. It thus becomes necessary to look to state law.

Most states appear to employ a "relation back" fiction to hold that if you disclaim an inheritable interest, that disclaimer "relates back" so that the beneficiary never receives or possesses the interest. There is accordingly nothing to transfer, and there can be no fraudulent transfer for purposes of Section 727. Alabama's statute (Ala. Code 43-8-294) reads similarly to those from states cited in McLaughlin, in expressly providing for relation back. I would suspect the Eleventh Circuit would see it similarly if presented with the question.