The First Circuit Court of Appeals recently decided the case of In re Nelson Smith, in which the issue of a penalty payment on an alimony obligation was determined to not be a domestic support obligation.  In Smith, a debtor had been ordered to pay certain alimony obligations as part of a divorce judgment.  The judgment further provided that the debtor pay his ex-wife a penalty if he was late in making his alimony payments.

 Smith was consistently late with his alimony payments, prior to filing Chapter 13 bankruptcy.  He was so late that the Massachusetts Probate Court held that he pay $75,000 in late payment penalties on the alimony payments.  After filing a Chapter 13 bankruptcy, Smith objected to his ex-wife's proof of claim for the alimony penalties, asserting that the penalties were not domestic support obligations, but claiming that they were just general unsecured debts and dischargeable in his Chapter 13 case.  Domestic support obligations are considered priority debts which are non-dischargeable.  The First Circuit's decision considered the nature of the penalty and how it was not conditioned upon the amount of each party's earning capacities, or other traditional alimony characteristics.  Instead, the penalty was just a punitive measure to assure payment of actual alimony to the ex-spouse.

The First Circuit's decision will encourage a fresh look at other "DSO" like obligations, and perhaps challenges as to whether those obligations are actually dischargeable general unsecured debts instead of non-dischargeable priority debts.