Filing for bankruptcy means asking a court to protect you from creditors and either cancel or reduce your debts. There are forms to file and schedules to fill out; you must disclose all creditors, debts, income and assets. Carrying through on a bankruptcy case can be difficult and time-consuming; if you receive alimony, the picture may get even more complicated.
As an individual, you have two bankruptcy options. With a Chapter 7 petition, you ask a federal court to discharge, or cancel, certain debts. Bankruptcy laws determine which debts can discharged. Some debts, such as income taxes and federally insured student loans, cannot be discharged. In return for having your debts discharged, you allow a court trustee to seize your property and sell it to pay your creditors. You may protect exempt property, such as Social Security benefits, clothing and household goods, from seizure. With a Chapter 13 petition, you set up a schedule of manageable monthly payments to your creditors through the trustee; in most cases the law obliges them to accept a partial repayment, and then allow a discharge of any remaining balances.
A recent reform of the bankruptcy laws made a means test mandatory for Chapter 7 bankruptcy filers. You must add together certain monthly income, including alimony and/or child support, to calculate whether that amount is above or below the median income for a household of your size in your state. If your income is above that mean income level, then you will not qualify for a Chapter 7; you must file a Chapter 13 petition.
Chapter 13 Plan
It is not necessary to qualify through a means test for a Chapter 13 bankruptcy. If you file a Chapter 13 petition, however, the court-appointed trustee will set up monthly payments to creditors. The amount depends on your income, including any alimony payments. The bankruptcy does not affect your right to receive court-ordered alimony, nor does it change the amount you should receive. Chapter 13 payments do not come directly from any specific source; they are calculated as a percentage of your total income.
Read More: Does the Bankruptcy Court Allow You to Pay Outside the Chapter 13 Plan?
Although you receive court ordered alimony, you may not be allowed to keep it in a Chapter 7. Federal bankruptcy courts reserve the right to determine what is actually alimony in a marital settlement. If you receive a support payment in the form of nonexempt property, or cash in lieu of property, that support may be subject to seizure by the trustee. There are several factors that indicate the payment is likely to be deemed alimony by a bankruptcy court: if the support payment is taxable to you as the recipient; if it can be modified; if it ends at death or remarriage; and if it actually goes to the support of you and your dependents. This is a complex area of the bankruptcy code, and the advice of someone experienced in this area of the law may be helpful.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.