Few issues cause more conflict in bankruptcy then a previous divorce with conflict between the spouses. Contentious divorces cause contentious bankruptcies. Some issues are clear. For example, alimony and child support can’t be discharged in any kind of bankruptcy. A property settlement obligation can’t be discharged in any kind of bankruptcy EXCEPT Chapter 13. But what about debts resulting from divorce that aren’t clearly identified as either alimony, child support or a property settlement? For instance, an award of attorney fees to one spouse in a divorce can be considered either support or part of a property settlement. Courts have ruled that the reason one spouse has been ordered to pay another spouse’s attorney fees is the crucial issue in deciding whether the fees are dischargeable in Chapter 13 bankruptcy. Some factors that help determine this question are the language of the agreement or court order; the relative financial condition of the spouses at the time of the divorce; the fact that one party receives the marital property; the past and future employment prospects of the parties; and whether it would be difficult for the spouse and children to subsist without the fees being paid. In other words, a bankruptcy court has to determine whether the award of attorney fees has the function and purpose of providing support to a spouse and children with less income and property.
A recent decision from the U.S. Bankruptcy Court for the Southern District of Iowa reviewed four different attorney fee awards from the previous divorce of a Chapter 13 debtor. For each award the Court analyzed what the state court said and intended about the purpose of the award and the financial needs of the spouses at the time the award was granted. One of the attorney fee awards was determined to be in the nature of support and nondischargeable in bankruptcy but three of the attorney fee awards were determined to not be in the nature of support and therefore dischargeable in Chapter 13 bankruptcy. The Court also ruled that the Chapter 13 debtor’s obligation to “hold harmless” the other spouse’s liability for taxes owed was not in the nature of alimony, maintenance or support and was therefore dischargeable.