Much like the “curse of the Lotto,” we hear time and time again about former professional athletes who earned millions during their playing years only to squander it all and find themselves penniless. Exhibit A: Former all pro defensive tackle Warren Sapp filed for bankruptcy this year.
Many view bankruptcy as an unpleasant process to erase their debts and get a fresh start in their financial lives; however, Sapp’s bankruptcy filing may not be the liberating tool he is searching for to ease himself from his enormous debts. That’s because Sapp is divorced and reported to owe a hefty $728,100 in back spousal and child support. Unfortunately for Sapp, who was able to elude topnotch offensive linemen for years, this is a debt he cannot elude – even in bankruptcy.
This situation is certainly not unique to Sapp. Many other high profile, former professional athletes (Evander Holyfield, Antoine Walker, Lenny Dykstra, Mike Tyson, Darryl Strawberry, Lawrence Taylor, to name a few) have found themselves faced with substantial outstanding family support obligations in the wake of a bankruptcy filing. With a divorce rate for professional athletes of almost 80 percent, it’s imperative that family law practitioners working with these high-profile clients understand how a bankruptcy filing an affect a celebrity’s significant obligations arising from family court.
What most divorcing parties don’t realize is that unpaid support obligations, or debts created from a divorce or paternity action, are not “erased” simply by filing for bankruptcy. Section 523(a) of the Bankruptcy Code, 11 U.S.C. Section 523(a), sets forth that certain obligations may not be discharged by a bankruptcy filing. One of these obligations is “domestic support” in Subsection(5). The most typical examples of domestic support are child and spousal support.
Courts have interpreted the bankruptcy code’s domestic support exemption liberally. Numerous bankruptcy courts have held that any obligation that enables a party to maintain basic necessities is a “domestic support obligation” under Subsection (5) of the code (see In Re Cummings, 244 F.3d 1263 (11th Cir. 2001), for a discussion of how the bankruptcy court considers the intent of the state court in determining the nature of the support award).
If a family court obligation is not discharged due to its classification as a “domestic support obligation,” it may still be exempt from discharge under Section 523(a)(15). Subsection (15) makes debts nondischargeable when they are “to a spouse, former spouse or child of the debtor and not of the kind described in Paragraph (5) that is incurred by a debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court[.]” In other words, 523(a)(15) makes property obligations arising from family courts exempt from discharge. Under marital settlement agreements, parties most typically assign certain debts (i.e., a mortgage) to one of the parties along with the asset (i.e. former marital residence) while including indemnification language that the party retaining the debt agrees to hold the other party harmless on the debt. But, when one of the parties files for bankruptcy, the analysis shifts to whether or not the debt is exempt from discharge under Section 523(a)(15).
Bankruptcy courts have held that the indemnification language creates a new debt that is exempt from discharge under Paragraph (15). As a result, the bankruptcy filing does not entirely erase the mortgage obligation carved out in the marital settlement agreement.
So while professional athletes, like Sapp, may get other financial relief from a bankruptcy filing, they may not escape the burden of their sizable family court obligations. That’s why professional athletes on the path of financial disaster need more than just money managers. They need skilled family law practitioners who can timely modify their support obligations, ensure proper drafting of all court orders for support and prepare their clients for the real financial impact of filing for bankruptcy.