|
|
|
BANKRUPTCY DISCHARGE OF PROPERTY DIVISION OBLIGATIONS
© 1996 National Legal Research Group, Inc.
The Bankruptcy Reform Act of 1994, which limited the dischargeability of obligations arising from property settlements, is producing a great deal of litigation between divorced spouses. Bankruptcy courts around the nation are struggling to decipher and apply the wordy and arcane language of the new exception to discharge, 11 U.S.C. 523(a)(15).
The new exception protects property division obligations from discharge in bankruptcy unless the debtor does not have the ability to pay the obligation or unless the benefit of discharge to the debtor outweighs the detriment to the creditor spouse.
A review of reported cases construing the new law shows that spouses who seek bankruptcy protection obtain a discharge of property settlement obligations under the new law at least as often as nondebtor spouses win a ruling of nondischargeability. This phenomenon, in turn, suggests that during property settlement negotiations lawyers should definitely not assume that property obligations will be nondischargeable. On the contrary, counsel should keep the possibility of future bankruptcy in mind when negotiating the structure and details of the property division. Moreover, where the client expects the other spouse to pay joint debts or where the client wants to accept an unsecured monetary award in installments, counsel should let the client know that the obligation may well be discharged if the other spouse files for bankruptcy. Since the question of dischargeability of property settlement obligations will turn primarily on the spouses' financial circumstances after the property settlement and dissolution, lawyers negotiating the division cannot predict the treatment of property settlement obligations in a future bankruptcy.
Part I of this article reviews the language of the new exception, and Part II summarizes cases interpreting the new law.
I. The New Exception - and Its Limitations
New Exception to Discharge. To the list of debts that are excepted from discharge, the Bankruptcy Reform Act of 1994 added an exception for debts (other than alimony, maintenance, or support debts) that are incurred "in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record." 11 U.S.C. 523(a)(15).
Two Exceptions. The statute lists two exceptions to the new rule of nondischargeability. Exception (A) makes the property division obligation dischargeable where the debtor cannot pay it and still have funds "reasonably necessary" to support himself and his dependents or to run his business. Specifically, this exception applies where
(A) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor and, if the debtor is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.
11 U.S.C. 523(a)(15)(A). Exception B makes the property division obligation dischargeable where the benefit of discharging it outweighs the detriment. Specifically, this exception applies where
(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor.
11 U.S.C. 523(a)(15)(B).
Legislative History. In a floor statement, the chairman of the committee that developed the reform explained the intent of the new section and emphasized the primacy of support needs:
Subsection (e) adds a new exception to discharge for some debts arising out of a divorce decree or separation agreement that are not in the nature of alimony, maintenance or support. In some instances, divorcing spouses have agreed to make payments of marital debts, holding the other spouse harmless from those debts, in exchange for a reduction in alimony payments. In other cases, spouses have agreed to lower alimony based on a larger property settlement. If such "hold harmless" and property settlement obligations are not found to be in the nature of alimony, maintenance, or support, they are dischargeable under current law. The debtor spouse may be saddled with substantial debt and little or no alimony or support. This subsection will make such obligations nondischargeable in cases where the debtor has the ability to pay them and the detriment to the nondebtor spouse from their nonpayment outweighs the benefit to the debtor of discharging such debts. In other words, the debt will remain dischargeable if paying the debt would reduce the debtor's income below that necessary for the support of the debtor and the debtor's dependents. The Committee believes that payment of support needs must take precedence over property settlement debts. The debt will also be discharged if the benefit to the debtor of discharging it outweighs the harm to the obligee. For example, if a nondebtor spouse would suffer little detriment from the debtor's nonpayment of an obligation required to be paid under a hold harmless agreement (perhaps because it could not be collected from the nondebtor spouse or because the nondebtor spouse could easily pay it) the obligation would be discharged. The benefits of the debtor's discharge should be sacrificed only if there would be substantial detriment to the nondebtor spouse that outweighs the debtor's need for a fresh start.
140 Cong. Rec. H10752, H10770 (daily ed. Oct. 4, 1994) (Floor Statement of Chairman Brooks). This explanation was included in H.R. Rep. No. 835, 103d Cong., 2d Sess. 54 (1994), reprinted in 1994 U.S. Code Cong. & Admin. News 3363. For extensive citation to articles explaining why Congress needed to enact bankruptcy reform for property settlement obligations, see Collins v. Hesson (In re Hesson), 190 B.R. 229 (Bankr. D. Md. 1995).
Results So Far. In cases reported so far, a number of former spouses have succeeded in their efforts to prevent discharge of a property settlement obligation by invoking 523(a)(15). E.g., Straub v. Straub (In re Straub), 192 B.R. 522 (Bankr. D.N.D. 1996) (state court judgment obtained in action to collect cash payment awarded to wife in property settlement was nondischargeable); Slover v. Slover (In re Slover), 191 B.R. 886 (Bankr. E.D. Okla. 1996) (hold-harmless obligation was not dischargeable); Owens v. Belcher (In re Owens), 191 B.R. 669 (Bankr. E.D. Ky. 1996) (husband's assumption of debt was not dischargeable); Collins v. Florez (In re Florez), 191 B.R. 112 (Bankr. N.D. Ill. 1995) (husband's obligation for credit card debts was not dischargeable); Anthony v. Anthony (In re Anthony), 190 B.R. 433 (Bankr. N.D. Ala. 1995) (obligation to pay loan for mobile home was nondischargeable); Florio v. Florio (In re Florio), 187 B.R. 654 (Bankr. W.D. Mo. 1995) (obligation to make payments to spouse under decree was not dischargeable); Carroll v. Carroll (In re Carroll), 187 B.R. 197 (Bankr. S.D. Ohio 1995) (obligation to pay half of mortgage payments was nondischargeable).
On the other hand, in a roughly equal number of reported cases, former spouses have obtained a discharge of their property obligations by invoking one or both exceptions. E.g., Bodily v. Morris (In re Morris), 193 B.R. 949 (Bankr. S.D. Cal. 1996) ($8,542 debt to equalize property division was dischargeable); Simons v. Simons (In re Simons), 193 B.R. 48 (Bankr. W.D. Okla. 1996) ($14,000 payment owed to husband under property settlement was dischargeable); Taylor v. Taylor (In re Taylor), 191 B.R. 760 (Bankr. N.D. Ill. 1996) (obligation under settlement agreement to reimburse wife for loss incurred in the sale of the marital home was dischargeable); In re Hesson, supra (wife's obligation to pay husband $20,000 was dischargeable); Silvers v. Silvers (In re Silvers), 187 B.R. 648 (W.D. Mo. 1995) (assumption of responsibility for car loan payments was dischargeable); Phillips v. Phillips (In re Phillips), 187 B.R. 363 (Bankr. M.D. Fla. 1995) ($120,000 lump-sum award was dischargeable); Woodworth v. Woodworth (In re Woodworth), 187 B.R. 174 (Bankr. N.D. Ohio 1995) (husband's obligation to pay debts assigned to him in divorce was dischargeable); Butler v. Butler (In re Butler), 186 B.R. 371 (Bankr. D. Vt. 1995) (husband's debts to wife, totaling about $250,000, were dischargeable); Becker v. Becker (In re Becker), 185 B.R. 567 (Bankr. W.D. Mo. 1995) (joint obligation assigned to wife in parties' divorce was dischargeable); Hill v. Hill (In re Hill), 184 B.R. 750 (Bankr. N.D. Ill. 1995) (obligation to pay parties' debts was dischargeable).
II. Judicial Interpretation
Burden of Proof. The statute does not squarely address which spouse has the burden of proof. A majority of courts so far have held that once the nondebtor spouse demonstrates that the debtor incurred the debt in connection with divorce, the burden shifts to the debtor to prove that discharge should be granted under either exception (A) or (B). In re Morris, supra; In re Hill, supra; In re Florez, supra. A minority view holds that the burden remains squarely on the nondebtor spouse to show that the obligation should not be discharged. In re Butler, supra. A middle view holds that the debtor spouse has the burden of showing an inability to pay under (A) and the nondebtor spouse has the burden of showing that the detriment of nonpayment outweighs the benefit of discharge under (B). In re Hesson, supra.
For an extensive discussion of the burden of proof under 523(a)(15) and recent bankruptcy court rulings on the issue, see In re Taylor, supra.
Measuring Date for Analysis of Exceptions. Most courts have held that the appropriate measuring date for making the analysis required by (A) and (B) is the time of the bankruptcy trial. In re Morris, supra (date of trial is preferable to earlier date so that court can consider parties' current financial circumstances); In re Taylor, supra; In re Hesson, supra. Another possible date is the time of filing the complaint. In re Hill, supra.
Under both views, the measuring date is later than in a case where a former spouse seeks to block the discharge of support or alimony debts under 523(a)(5), which looks to the time of entry of the divorce decree. See In re Hill, supra; In re Becker, supra. Thus, a change in circumstances after the divorce affects dischargeability of property settlement obligations but not dischargeability of alimony or support obligations. In re Anthony, supra.
Ability to Pay. When evaluating the debtor's ability to pay under exception (A), most courts have applied the "disposable income" standard used for considering objections to Chapter 13 plans. In re Morris, supra; In re Hesson, supra; In re Carroll, supra; In re Phillips, supra. Another approach is to apply the "disposable income" standard and to incorporate part of the "undue hardship" test used in connection with evaluating student loans under 523(a)(8). In re Straub, supra; In re Florio, supra.
Several cases have closely examined the debtor's listed expenses and adjusted them to the amount reasonably necessary for support. E.g., In re Morris, supra; In re Owens, supra; In re Slover, supra.
Several cases have held that the debtor's ability to pay over timeshould be considered. E.g., In re Taylor, supra; In re Morris, supra; In re Straub, supra.
One court even recognized the concept of "partial discharge," borrowed from student loan cases, where the debtor spouse has the ability to pay part of the debt. Comisky v. Comisky (In re Comisky), 183 B.R. 883 (Bankr. N.D. Cal. 1995). Other courts which have considered the partial-discharge issue have held that the statute requires an all-or-nothing approach, however. In re Taylor, supra; In re Silvers, supra.
Benefit Versus Detriment. To weigh the benefit of discharge to the debtor against the detriment of discharge to the nondebtor, the standard for weighing the equities is the "totality of circumstances" standard. In re Morris, supra; In re Hill, supra. Under this standard, the court considers several nonexclusive factors: (1) the income and expenses of both parties; (2) whether the nondebtor spouse is jointly liable on the debts in question; (3) the number of dependents; (4) the nature of the debts; (5) the reaffirmation of any debts; and (6) the nondebtor spouse's ability to pay. In re Hill, supra; In re Morris, supra.
Where the debtor has the ability to pay and where discharging the disputed obligation would merely give him or her additional discretionary income, the equities usually weigh in favor of the nondebtor and a finding of nondischargeability under (B). See, e.g., In re Carroll, supra; In re Florio, supra. A finding that the debtor has the ability to pay the obligation does not necessarilymean that the debtor will be less harmed if forced to pay it, however. In re Morris, supra. The balance may tip in favor of discharge if, for example, the debtor's budget is very tight or if payment of the debt would jeopardize the debtor's relationship with his children. Id. If the nondebtor spouse is affluent and can easily pay the debt, that circumstance weighs in favor of discharge. In re Taylor, supra (recognizing the possibility, however, that some "horrible non-economic detriment" to an affluent spouse may weigh against discharge in some cases). At the other end of the spectrum, if the nondebtor is hopelessly in debt, that circumstance likewise weighs in favor of discharge, because the best solution may be for both spouses to seek bankruptcy protection. In re Morris, supra; In re Hill, supra; see also In re Woodworth, supra (balancing test favored discharge where former wife, as nondebtor spouse, could not easily pay debt and it could not be collected from her, either). But see In re Slover, supra(excepting debt from discharge even though nondebtor was a prime candidate for bankruptcy).
One court said that when the balance of equities between the debtor and nondebtor is equal under (B), the debtor loses and the debt is nondischargeable, because by its express terms the exception applies only if the benefit to the debtor "outweighs" the detriment to the nondebtor. In re Anthony, supra. Another court suggested that application of exception (B) will usually result in the same outcome as before the bankruptcy reform measure the debt will be discharged. In re Hesson, supra (short of a greater showing of present need, it is hard to conceive of a situation where the nondebtor spouse prevails).
Exceptions Are Disjunctive. Courts agree that the debtor must meet the showing required on only one of the two exceptions to prevent the debt from being held nondischargeable. In re Taylor, supra; In re Carroll, supra; In re Florez, supra.
Go to: Bankruptcy Category
Go to: Cases of Interest by Category
Go to: Previous Page
| Featured Services | |
|
| The Research Center: (Divorce Cases of Interest) | Research Home | ||||
Find Case Law, Case Analysis, and Divorce Information...
| |||||
Copyright© 1996-2009. All rights reserved by Divorce Source, Inc.
Comments & Suggestions? or Recommend This Page to a Friend!