How to Handle Bankruptcy and Alimony

How to Handle Bankruptcy and Alimony
29 - Aug - 2023
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According to a recent study, Wisconsin Rapids is the divorce capital of Wisconsin, with divorced people comprising 19.1% of the town’s residents. A significant increase over the statewide divorced population of 10.8%. Paying alimony is the reality for many people after divorce. But what happens to alimony payments if the payee declares bankruptcy? 

Bankruptcy laws can have an interesting impact on alimony payments. When someone files for bankruptcy, it’s usually to eliminate or reduce many debts, but alimony payments generally aren’t removed. These are considered a domestic support obligation, which means they must be paid even after bankruptcy. Depending on specific circumstances, a bankruptcy case may change how or when alimony payments are made but doesn’t usually change the amount owed. Some bankruptcy laws might prioritize alimony over other debts, meaning those payments are handled first. Alimony involves both financial and family laws, and understanding how these laws intersect can help people make sense of their obligations and rights when dealing with bankruptcy and alimony.

What is Alimony? 

Alimony is a financial support payment made by one ex-spouse to the other after a separation or divorce. It’s intended to help the lower-earning spouse maintain a lifestyle similar to what was enjoyed during the marriage, especially if one spouse significantly out-earned the other or if one spouse left the workforce to care for children or the household. The terms, including the amount and duration of alimony payments, are typically determined by a court and may consider factors like the length of the marriage, the financial situation of both parties, and the needs of the receiving spouse. Laws and practices regarding alimony can vary significantly by jurisdiction, and it remains a complex aspect of family law.

Alimony Laws in Wisconsin

In Wisconsin, alimony is referred to as “spousal maintenance.” The laws governing spousal maintenance aim to provide financial support to a lower-earning or non-earning spouse following a divorce.

The courts in Wisconsin have significant discretion in determining whether to award spousal maintenance, the amount, and the duration. Some factors the court may consider include:

  • Length of the marriage
  • Age and physical health of both parties
  • Division of property
  • Educational level of each party and earning capacity
  • Contribution by one party to the education, training, or increased earning power of the other
  • Agreements made between the parties.
  • The ability of the paying spouse to meet their own needs while paying spousal maintenance.
  • Tax consequences

There is no specific formula in Wisconsin to calculate spousal maintenance, so the judge’s decision is often based on a complex analysis of these and other relevant factors. The decision can be temporary or permanent, and the maintenance award can be modified under certain circumstances if there is a substantial change in the situation.

Divorce and Bankruptcy: Timing Matters

Financial struggles, whether occurring before, during, or after divorce, often contribute to an individual’s decision to file for bankruptcy. For those submerged under minimum payments on considerable debt obligations, bankruptcy provides essential relief, particularly for consumer debt. How bankruptcy affects divorce and alimony depends largely on the timing of the divorce.

When a divorce has not yet reached its conclusion and one spouse files for bankruptcy, an automatic stay is implemented by the bankruptcy court. An automatic stay is a legal provision which temporarily halts actions by creditors to collect debts from an individual who has filed for bankruptcy. It is called “automatic” because it takes effect immediately upon the filing of a bankruptcy petition, without the need for a court order or further action.

The stay prevents creditors from pursuing various collection activities such as calling, sending collection letters, filing lawsuits, garnishing wages, or repossessing property. It provides a temporary reprieve for the debtor, allowing time to work with the bankruptcy court to develop a plan to restructure or eliminate debts.

While an automatic stay is broad in its reach, there are certain exceptions. Some actions, such as collection of child support or alimony, might not be halted by the automatic stay. Depending on the type of bankruptcy filed and the specific situation, the stay may have varying durations and effects, but generally, it serves to protect the debtor from relentless collection efforts during the bankruptcy process.

Such a stay can abruptly stop divorce proceedings, prohibiting creditors from taking collection actions like wage garnishment. To move forward with divorce-related matters, a temporary lifting of the stay would need to be ordered by a court. Some financial aspects tied to divorce, including child support or alimony, may remain unresolved while the bankruptcy stay is active. Additionally, division of marital property within the bankruptcy estate may be prohibited.

If a divorce has been finalized and an ex-spouse declares bankruptcy, overdue child support and alimony are categorized as non-dischargeable debts. Even if an ex-spouse enters bankruptcy, obligations for alimony continue beyond the discharge of bankruptcy. Bankruptcy can, however, make existing debt responsibilities and ongoing alimony payments more manageable. By addressing non-dischargeable debt through bankruptcy, more resources may be available to keep up with payment commitments.

Bankruptcy might not alter alimony payments or relieve the responsibility of repayment, but certain factors might necessitate a bankruptcy filing, possibly leading to a modification in the alimony award. In such a case, the spouse responsible for payments must file a motion to modify maintenance with the court. A hearing will then review if significant life changes, like job loss or other financial hurdles, justify an adjustment to the initial alimony award.

Is it Possible to Change the Amount of Alimony During Bankruptcy? 

Alimony Law

Two situations may allow the bankruptcy court to adjust the sum of alimony paid to the spouse receiving support while going through bankruptcy proceedings. The initial circumstance occurs if the spouse providing support files a petition for Chapter 13 bankruptcy. In such a case, the individual owing the money can seek a modification of the alimony amount, subject to the bankruptcy court’s approval.

Another scenario may unfold if the spouse entitled to receive alimony transfers this right to a third entity like a bank or lending establishment. If the right to alimony is reassigned in this manner, the obligation to make these payments might be eliminated, as the law will no longer recognize them as payments for spousal support.

Moreover, the sum a supporting spouse is mandated to pay will hinge on what can be reasonably managed financially. Therefore, if bankruptcy impacts the ability of the supporting spouse to fulfill alimony payments, it may become a significant consideration in the court’s assessment of the monthly alimony payment required.

Seeking advice on how a tough economy might affect your bankruptcy options is a step in the right direction. Additionally, the increasing rate of medical debt bankruptcies highlights the importance of being aware of all potential pitfalls. It’s also noteworthy that many veterans find a fresh start through specific bankruptcy solutions. For those in the Oshkosh area, detailed guidance and support can be found on the My Debt Advisors Oshkosh Office page, where experts are ready to assist. All this information and more can be found on My Debt Advisors website, where experts are ready to assist.

If you are filing for bankruptcy, contact us or call us at 866-696-6432 today for a free consultation.

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