When California couples file for divorce and one party is ordered to or agrees to pay alimony, that obligation is not dischargeable if the payer later files for bankruptcy. It is important to note that not every provision in a divorce settlement will be considered to be alimony, however.
In June, a bankruptcy court found that an indemnity provision contained in a divorce property settlement agreement did not constitute alimony and was dischargeable in a Chapter 13 bankruptcy case. In that case, a couple who married in 2000 later divorced in 2009. The couple reached a property settlement agreement in which the husband received the marital home. He agreed to take on the full responsibility of paying the mortgage and keeping the home in good repair. He also agreed to indemnify his former wife and was to refinance the mortgage in his own name.
The man failed to make the payments and failed to refinance the home. He subsequently was unable to sell it. His ex-wife objected to the discharge of the debts she incurred from his failure to make the payments and to refinance the mortgage. She also tried to claim that the indemnification provision constituted spousal support. The court disagreed, pointing to the fact that both parties specifically waived their rights to seek spousal support in the agreement.
The case illustrates the importance of wording property division settlement agreements carefully. If a couple owns a home together and they are divorcing, it is important to decide how to handle the residence. If both have their names on the mortgage, they may want to negotiate refinancing the home or selling it in order to disentangle their finances from each other.