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Property Distribution in Bankruptcy

For many years the bankruptcy courts drew a distinction between support payments and property distribution (equitable distribution) payments in determining whether an obligation in a family law court order or agreement could be discharged in bankruptcy. In the past, payments deemed to be in the nature of support were not dischargeable in bankruptcy, such as alimony or child support. However, payments deemed to be not in the nature of support and for purposes of property distribution were subject to discharge in bankruptcy, such as payment of a mortgage or credit card. In other words, payments for alimony or child support were protected while obligations to pay joint debts or payments to equalize assets could be discharged and lost.

However, the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act changed this. Now, debts and obligations to a spouse, former spouse or child incurred in a divorce or separation agreement or order may not be discharged. This applies, for example, to situations where a spouse is obligated in a family law order or agreement to make payments for assets divided in divorce, such as purchasing another spouse’s interest in a home, or where the spouse is obligated to pay credit cards, loans, mortgages or debts.

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