Late payment penalties
A recent 1st U.S. Circuit Court of Appeals decision allows late payment penalties imposed on untimely alimony payments to not qualify as a domestic support obligation and therefore be dischargeable. The decision in In Re: Smith, Nelson J. (Docket No. 09-9005), an appeal from the Bankruptcy Appellate Panel for the 1st Circuit, found that “the late fee was intended to encourage payment of alimony and was not itself alimony . . . Since (obligee) had no expectation of this payment unless and until (obligor) was late, it follows that the only way this contingent payment could be considered alimony is if it was meant to compensate (obligee) for the time during which she was waiting for her alimony payment.” This late payment penalty was a fixed fee and “had the parties provided for an interest-bearing fee, contingent on the amount of alimony outstanding, (obligee) would have a stronger argument.” In fact, the penalty was also separate from the costs of a contempt action as “legal fees incurred in enforcing the agreement, a provision not always contemplated in such contracts, were clearly provided for in this instance.” While this decision is only applicable to cases filed within the 1st Circuit’s jurisdiction, a qualified bankruptcy practitioner in your area can clarify for you whether or not a particular debt owed would be considered a domestic support obligation for the purposes of dischargeability.
