Schultz versus Schultz. Mr. and Mrs. Shultz were going through a divorce in the District Court of Buffalo County, Nebraska. On August 30, 2011, the court enters an order that provides:
To equalize the division of the property of the parties and allocation of the indebtedness to be paid, the court finds that a judgment is entered in favor of [Mr. Shultz] and against [Ms. Shultz] in the amount of $25,000 with that judgment to accrue interest at the legal rate from this date forward.
This part of the divorce decree concerned only a property settlement between the parties, not child support and not alimony. At the end of the divorce, Ms. Shultz owed her ex-husband $25,000 to even out the finances between the two.
About 6 months later, Ms. Schultz files a Chapter 13 bankruptcy in Nebraska. She lists as a creditor her ex-husband, who she owes $25,000 to per the divorce decree. Ms. Schultz’s bankruptcy categorizes Mr. Shultz’s debt just like any other unsecured creditor. In other words, no special treatment or attention would be paid to Mr. Schultz’s debt compared with the other unsecured creditors. At the end of the Chapter 13 bankruptcy, Ms. Schultz would not owe her ex-husband a penny more. Of course, she will need to complete her case fully to get a discharge.
Chapter 13 discharges property settlements. Chapter 7 does not!
This is a little known fact but an extremely important one to understand. Filing a Chapter 7 bankruptcy does NOT wipe out property settlements to ex-spouses. Chapter 13 does (unless the property settlement is disguised as support)! Chapter 13 bankruptcy requires a monthly payment to the bankruptcy trustee for a period of 36 to 60 months (several factors determine how long it is). A Chapter 7 bankruptcy does not require any payments. However, most Chapter 13 payments are very modest and affordable. There are some Chapter 13 cases that have monthly payments as low as $125 a month. Chapter 7 bankruptcy is a great tool when it’s the right fit, but it certainly is not the right choice if you owe a significant amount of debt as a result of a property settlement.