As 2018 wraps up, millions of people are finalizing their divorces, trying to beat the New Year. The reason is that December 31, 2018, marks the end of tax deductions for alimony payments. If a divorce decree is entered by December 31, the alimony paid is tax deductible. After that date, alimony is no longer tax deductible.
In the rush to finalize a divorce, don’t overlook the bankruptcy implications. Bankruptcy doesn’t impact alimony; in fact, “domestic support obligations” such as alimony, child support and just about any payments ordered to be paid to a spouse under a divorce decree get favored treatment in bankruptcy in terms of being paid first. But there are other aspects of divorce that affect or can be affected by bankruptcy of one of the spouses later on.
In the past year I have two cases where a client has faced claims by the ex-spouse’s bankruptcy trustee over property that was awarded to the client in the divorce. What happened was, the divorce decree awarded the marital home to my client, in one case outright, in the second case subject to some equity to the ex-spouse upon refinance or sale. However, in neither case did the client obtain a deed from the ex-spouse conveying the ex’s interest to my client. As a result, the house remained titled in the name of both parties. Years later the ex filed bankruptcy. The bankruptcy trustee discovered the house titled in both parties’ names and tried to force a sale so he could take the ex’s 1/2 interest and use that to pay her creditors. Even though the divorce decree clearly spelled out the ex’s interest, the trustee took the position that since title was still in both parties’ names, he was entitled to 1/2 the interest. As you can imagine this caused a lot of stress and worry for my clients, who both thought their respective divorces were over and done with and they owned their houses.
In both cases we were able to work out a compromise with the bankruptcy trustee. My clients weren’t happy that they ended up paying some money to keep what they thought was theirs, but they recognized the problem that had been created by failing to record a piece of paper and were glad to be able to keep their homes. The lesson is, if you’re going through a divorce, make sure to change how all property awarded in the decree is titled. Don’t rely on the decree itself. If you have bankruptcy questions, please contact us.