May Child Support Be Discharged In Bankruptcy Court?
As a divorce and family law attorney for the past two decades, I have watched far too many “dead beats” here in New Jersey try to do anything they can think of to avoid their legal obligation to support their children. The lawyers at my law firm strive to protect children and the child support that they need and deserve. Fortunately, the federal government has joined New Jersey in taking action to do everything possible to protect kids and secure their child support. A common question over the years has been, “May child support be discharged in Bankruptcy Court?” As a New Jersey family law attorney, I am happy to report that the answer is no. The following case illuminates the details.
In Schorr v. Schorr, husband Harvey Schorr appealed an order that declared that the obligations that he agreed to in a property settlement agreement were actually support obligations and therefore nondischargeable in bankruptcy. He argued that his obligations were actually equitable distribution and thus dischargeable and so the court should have held a plenary hearing concerning the issue of dischargeability.
Harvey and Deborah Schorr were married on August 29, 1976 and divorced on June 19, 1996. In connection with their divorce, the parties negotiated and executed a property settlement agreement. Article II of the property settlement agreement was entitled “Support and Maintenance of Husband and Wife.” In the provision, Harvey agreed to pay Deborah $ 300 every week in alimony, to pay all outstanding medical, dental, vision, prescription and related expenses incurred as of the date of the final judgment of divorce. Furthermore, the property settlement agreement provided that once his obligation to pay Deborah’s health insurance was over he would pay an additional $ 100 every month that would be applied toward the reduction of the outstanding principal balance of his obligations under Article IV, Paragraph 8.
Article III, entitled “Insurance to Secure Husband’s Obligations,” provided that Harvey would maintain a term life insurance policy on his life in the amount of $ 200,000 and Deborah would be named as beneficiary until Harvey satisfied the obligations enumerated in Article IV, Paragraph 8, and all third party debts that Deborah might be responsible for. Once the debts become fully paid, he would only be required to pay $ 150,000 worth of coverage for the premium. Deborah would have the option of the paying the additional amount on a $ 200,000 policy or could accept the lower amount of coverage which Harvey was required to provide.
Article IV, entitled “Equitable Distribution of Property,” required Harvey to pay a total of $ 45,518 to Deborah in installments. This represented her share of Harvey’s accounting practice. Article V, “Indebtedness,” provided that Harvey would be responsible for all the debts of the parties as of the date of the final judgment of divorce. Paragraph 12 of Article XI entitled “Husband’s Bankruptcy,” explicitly provided for the possibility of Harvey filing for bankruptcy after the execution of agreement. Within it Harvey made a representation and warranty that he had no present intent to file for bankruptcy and agreed that if he did choose to file for bankruptcy in the future, he would not discharge any of obligations to his ex-wife. He further recognized that his ex-wife would be relying on all of Harveys’ payment and indemnification obligations t her for support and maintenance, regardless of the characterization of any particular obligation as support, alimony, equitable distribution or otherwise. Finally, should Harvey file a bankruptcy petition and try to discharge any of his obligations to Deborah, all of his obligations, including but not limited to, alimony, support, equitable distributions, payment of insurance and payment of child support and his relief of debt, shall be considered in determining the appropriate post-petition level of alimony or support that he will be required to pay to Deborah.
On January 22, 1998 Harvey filed a petition for Chapter 13 bankruptcy, and his obligations under the property settlement agreement were put under automatic stay. On May 29, 1998, the Bankruptcy judge entered a consent order that vacated the stat so the Family Part Judge could conduct a hearing to determine the nature of Harvey’s obligations under the agreement and to specifically determine which of the obligations were in the nature of equitable distribution and dischargeable and which were in the nature of support and nondischargeable. In a written opinion dated November 1, 1999, Judge Donaldson found that the obligations enumerated in the property settlement agreement were purely support obligations, and therefore no dischargeable in bankruptcy. Harvey’s motion for reconsideration was denied on January 21, 2000.
According to the 1976 New Jersey Appellate Division case of Stein v.Fellerman, alimony and support obligations may not be discharged in bankruptcy. However, portions of a property settlement agreement that are not viewed as being like alimony, such as debt assumed as part of equitable distribution, are indeed dischargeable. The burden of proof would be on the spouse claiming the liability is nondischargeable. To determine the nature of an obligation, courts are not bound by the label or title in the property settlement agreement. According to the United States Third Circuit case of Gianakas v. Gianakas, in determining whether obligations arising out of a divorce settlement are actually support obligations, a court must “look beyond the label attached to an obligation by a settlement agreement to examine its true nature.” The intent of the parties at the time of the settlement agreement must be discerned. To do so, the court must analyze the following three factors: 1) the language of the agreement in the context of surrounding circumstances; 2) the parties’ financial circumstances at the time of the settlement; and 3) the function of the obligation at the time of the divorce or settlement. The New Jersey Appellate Division found that after applying these principles, Judge Donaldson correctly concluded that Deborah met her burden of proving that Harvey’s obligations were analogous to spousal support or maintenance in nature and not dischargeable.
The property settlement agreement was clear as to the intention of the parties. Conversely, the fact that some of the obligations that Harvey wished to discharge were contained under the “Equitable Distribution,” section was not dispositive of the issue of dischargeability. Moreover, Article XI, paragraph * explicitly provided that the parties intended the section headings for reference only, and not to have any substantial impact on the interpretation of the agreement. Furthermore, the parties clearly anticipated and contemplated the potential and effect of Harvey filing for bankruptcy in the future, and the need for Deborah to be supported regardless of his bankruptcy status, when they entered into the agreement. The certifications of Harvey and his attorney, James Thompson expressed the understanding as to the support-related nature of the agreement. Thompson specifically certified that “it was clearly the intent of the parties that all of the defendant’s obligations under the agreement were necessary as spousal support,” regardless of the classification of the obligation as alimony or equitable distribution.
The clear language of Article XI provided a conclusive answer as to the nature of Harvey’s obligations under the property settlement agreement as support-related. The remaining two factors of the Gianakas test, the financial circumstances of the parties at the time of the settlement, and the function served by the obligation at the time of settlement also support the position that the obligations were support-related in nature. Deborah suffered from various illnesses, including asthma, chronic bronchitis, sciatica and gastroesophageal reflux disease at the time of the divorce. She was also unemployed at that time, and left the marriage with no assets other than the tangible personal property which person retained. She did not have a pension, 401K, property or items of value, other than the $ 300 per week she would receive from Harvey as alimony and her share of his practice, which she was to receive in installments over seven years. On the other side of the coin, Harvey was a certified public accountant with an established practice who was able to provide a very comfortable lifestyle for his family throughout the marriage. Consequently, the New Jersey Appellate Division found that Harvey must be held accountable for his obligations under the property settlement agree, and thus affirmed and remanded the case to Judge Donaldson for an enforcement hearing.
If you face an issue with child support here in New Jersey, please reach out to my law firm today to learn how we may be of assistance.