Is a Penalty for Late Payment of Alimony or Spousal Support a Domestic Support Obligation in Bankruptcy?
Not in the case of Smith v. Pritchett, 586 F.3d 69 (1st Cir. 2009) where the United States Court of Appeals for the First Circuit ruled that a $50 a day penalty for late payment of alimony or permanent spousal support was not a nondischargeable “domestic support obligation” under Bankruptcy Code Section 101(14A). While this case is not binding authority in the Fourth Circuit, which includes the U.S. Bankruptcy Court for the Eastern District of Virginia, the analysis is useful to an understanding of divorce and bankruptcy law in Virginia.
In Smith, the United States Court of Appeals addressed a divorce agreement (also known as a property settlement agreement or separation agreement) filed jointly by the parties. The agreement provided that husband would pay wife a $50 fee for each day that he was late in alimony or spousal support payments. Shortly after the divorce agreement became effective, husband appeared to have fallen in arrears and subsequently filed a voluntary petition under Chapter 13 of the Bankruptcy Code. Wife filed a proof of claim for $82,000 in his bankruptcy case. The claim was for $50 per day penalties that had accumulated under the terms of the parties’ divorce agreement since the debtor had been consistently late in his alimony payments. Wife argued that her claim was for a “domestic support obligation” and, was entitled to priority and was nondischargeable under Section 523(a)(5) of the Bankruptcy Code.
The Court disagreed with the ex-wife and ruled that a penalty for late payment of alimony provided in the divorce agreement was not itself alimony and was not a domestic support obligation, so it is dischargeable. The court came to this conclusion by analyzing the divorce agreement which described the penalty as fixed, compared to the monthly alimony payment which ranged from $2,300 to as low as $1,000, depending on the year and if ex-wife remarried. Since the $50 fee was a fixed, the court ruled that the fee had “no connection to the actual alimony owed to Wife.” Furthermore, the court concluded that the fee could not be regarded as having been intended to compensate Wife for any tardiness in receipt of the monthly alimony, but was rather meant as a punitive sanction for late payments. The ex-wife’s claim is a general unsecured claim not entitled to priority status and can be discharged in the husband’s (the debtor’s) bankruptcy.
Hence, a Chapter 13 debtor in Virginia may be able obtain a bankruptcy discharge of late payment penalties assessed pursuant to similar alimony provision in his or her divorce agreement.
You should consult with your Virginia divorce lawyer concerning the likely effects of including a late penalty fee for alimony payments within a divorce agreement.