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Can Alimony Payments Be Discharged via Bankruptcy?

If you've been ordered to pay alimony after your Pasadena divorce, you may be interested in the case of former billionaire Samuel Wyly. Wyly is seeking to have his $500,000 yearly spousal support obligation included in his recent Chapter 11 bankruptcy protection. Wyly, along with his late brother Charles, is the founder of arts and crafts retailer Michaels Stores, Inc. as well as several other companies.

In most cases, alimony obligations can't simply be discharged as part of a bankruptcy proceeding. However, there are two noteworthy exceptions to the rule. The first exception occurs if the divorce decree has improperly classified the payments as alimony, whether the misclassification is an innocent error or a deliberate attempt to seek tax benefits by changing the classification of the payment. The second exception occurs if the obligation has been assigned to a third party, which sometimes occurs when the paying spouse is behind on payments and a third party has been enlisted to collect the money.

Torie Steele, formerly known as Victoria Lee Wyly, divorced from Wyly in 1991 in Los Angeles. The original divorce judgement called for an upfront payment of $4.19 million, followed by additional monthly payments to Steele. Shortly after, Wyly agreed to manage $5 million of his ex-wife's money. Steele was promised $500,000 a year in investment income as a way to avoid the cost and potential risks of a court hearing regarding spousal support.

Wyly is arguing that his debt to Steele should be classified as a contract debt. Contract debts, unlike domestic support obligations, are dischargeable in a bankruptcy filing. Wyly's previous attempt to get out of their deal was denied by a judge in 2007, according to Steele's adversary proceeding in the Dallas bankruptcy court.

How Can We Help?

Please call our office at (626) 683-8113 or email us at info@PasadenaLawOffice.com if you have questions about California's laws surrounding spousal support payments. Our Pasadena divorce law firm is eager to advocate for your needs and help you move on with the next stage of your life.

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