The marriage didn’t work out, so you got separated. It happens, right? Not a fun thing but, “til death do us part,” often doesn’t hold true.
Financially, you did what you had to do. There was an agreement for alimony and child support, and the payments are going as intended.
Still, those debts are piling up faster than dirty socks on the floor (which is one of the reasons the marriage didn’t last, but that’s another story). You’re thinking about bankruptcy, and hoping to get into a Chapter 7 to wipe out the debts.
Not so fast. Those alimony and child support payments may be a problem.
Alimony And Child Support As Income In Chapter 7 Bankruptcy
Under the U.S. Bankruptcy Code, the money you get for alimony and child support is considered income for means testing purposes. That income could push you over the median income, taking the Chapter 7 bankruptcy option away from you.
When completing the means test, you must include
[a]ny amounts paid by another persona or entity, on a regular basis, for the household expenses of the debtor or the debtor’s dependents, including child support paid for that purpose.
That doesn’t mean only money that’s required under court order. If you’ve come to an informal agreement, that’s going to come into play as well.
Money’s money, and it’s all got to get accounted for when you’re doing your means testing calculations.
Child Support and Alimony Payments May Be Proper Expenses In Chapter 7
On the flip side, if you’re the one spending the money each month then you may think you can take those expenses are deductions for means testing purposes.
Not so fast. According to the Official Forms, you can deduct “the total monthly amount that you are required to pay pursuant to the order of a court or administrative agency, such as spousal or child support payments.” In other words, you get to deduct those amounts only if a court has ordered you to make those payments.
You may, however, be entitled to deduct payments for health care, child care or education under some circumstances. If you’re making those payments voluntarily rather than by order of a court, you may be in luck.
What’s The Solution?
For the person who’s paying the money, the solution is to get the obligation ordered by the court. It’s a smart move even without bankruptcy as well; this way, everyone knows what they need to do under the law.
For the recipient, the answer may be Chapter 13 as a way of reorganizing your finances. After all, it doesn’t make much sense financially to stop taking the child support and alimony payments merely to qualify for Chapter 7 bankruptcy.
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