|
|
|
DEBTS INCURRED DURING MARRIAGE
© 1997 National Legal Research Group, Inc.
Many divorcing couples owe substantial debts, ranging from secured debts such as car loans and home loans to unsecured debts such as credit card expenditures and educational loans. For these clients, the distribution of debts matters just as much as the distribution of assets.
An examination of case law in the last few years on debts and equitable distribution reveals several recurring themes. One frequently litigated issue involves alleged debts to relatives is the debt a real obligation or not? Another frequently litigated issue is classification should the debt be viewed as marital or as the separate property of the spouse who incurred it? Yet another recurring question centers on distribution how should responsibility for payment of debts be allocated?
Part I of this article summarizes recent cases on identification and classification of debts incurred during marriage. Part II reviews cases that address disputes over the distribution of marital debts.
I. Classifying Debts
Identifying True Debts. A spouse who has received property or money from relatives frequently takes the position in dissolution proceedings that the transfer was a loan and that the parties are obligated to repay the loan.
Courts scrutinize the facts carefully in such cases to determine whether the asserted obligation is genuine or a ploy to reduce the marital estate. The testimony of the parties and the transferor on the question is relevant, see Baker v. Baker, 866 P.2d 540 (Utah Ct. App. 1993), but courts tend to give more weight to objective evidence. For this reason, undocumented transfers are usually held to be gifts rather than loans. E.g., Huerta v. Huerta, 127 Idaho 77, 896 P.2d 985 (Ct. App. 1995); In re Marriage of Heinze, 257 Ill. App. 3d 782, 631 N.E.2d 728 (1994); In re Marriage of Pulley, 652 N.E.2d 528 (Ind. Ct. App. 1995); Panettiere v. Panettiere, 945 S.W.2d 533 (Mo. Ct. App. 1997).
Documentary evidence is not required to sustain a trial court's finding that a valid debt exists, however. Pfeifer v. Pfeifer, ___ Mont. ___, 938 P.2d 684 (1997) (testimony of trust officer constituted competent evidence that husband owed $631,000 for loans secured by mortgages on two homes purchased with borrowed trust funds).
Even where a loan document exists, the transfer is often held to be a gift rather than a loan if the "loan" has been outstanding for years with no history of payments being requested or made. E.g., Kelly v. Kelly, 2 Neb. Ct. App. 399, 510 N.W.2d 90 (1993); Finlayson v. Finlayson, 874 P.2d 843 (Utah Ct. App. 1994). And if the loan documents are prepared during or after marital breakdown, courts generally find no valid debt. E.g., In re Marriage of Blazis, 261 Ill. App. 3d 855, 634 N.E.2d 1295 (1994); Cole v. Cole, 880 S.W.2d 477 (Tex. App. 1994).
Classifying Debts General Principles. In an "all property" jurisdiction that does not distinguish between separate and marital property, "marital debt" is any and all debt incurred by either party during the marriage. In re Marriage of Scoffield, 258 Mont. 337, 852 P.2d 664 (1992). In a dual classification jurisdiction, courts must classify debts as either marital or separate. Frank v. Frank, 311 S.C. 454, 429 S.E.2d 823 (Ct. App. 1993); Stumbo v. Stumbo, 20 Va. App. 685, 460 S.E.2d 591 (1995). A debt is classified as marital if it was incurred during the marriage for the spouses' joint or mutual benefit. Basos v. Basos, ___ A.D.2d ___, 663 N.Y.S.2d 388 (1997); Hardy v. Hardy, 311 S.C. 433, 429 S.E.2d 811 (Ct. App. 1993); Stumbo v. Stumbo. Some disagreement exists about the burden of proof on this issue. Compare Feldman v. Feldman, 203 A.D.2d 268, 611 N.Y.S.2d 879 (1994) (burden is on spouse who claims debt is marital), and Tucker v. Miller, 113 N.C. App. 785, 440 S.E.2d 315 (1994) (same), with Smith v. Smith, 124 Idaho 431, 860 P.2d 634 (1993) (debts incurred during marriage are presumed to be community debts), and Hardy v. Hardy (rebuttable presumption exists that debt incurred before cutoff date is marital).
Generally, debts incurred after the cutoff date for identifying marital property are not debts of the marriage to be paid out of the marital estate. Fuehrer v. Fuehrer, 651 N.E.2d 1171 (Ind. Ct. App. 1995); Huguelet v. Huguelet, 113 N.C. App. 533, 439 S.E.2d 208 (1994).
Classification of Particular Debts. The following are some notable classification rulings on particular debts in the past few years:
Home equity line of credit - The marital or separate nature of debt incurred during the marriage through the husband's home equity line of credit was a question of fact which depended on the circumstances under which and for whose benefit the underlying expenditures were made. Summary judgment in the wife's favor was error. Jonas v. Jonas, ___ A.D.2d ___, 660 N.Y.S.2d 487 (1997).
Credit card bill - A $3,101 VISA bill in the wife's name was her separate debt, where she admitted that she had no documentation to show what purchases were charged to the bill. No competent evidence showed that the debt was incurred for the joint benefit of the parties. Riggs v. Riggs, 124 N.C. App. 647, 478 S.E.2d 211 (1997).
Student loans - The husband's student loans, which were contracted during the marriage, were properly considered part of the marital estate. Roberts v. Roberts, 670 N.E.2d 72 (Ind. Ct. App. 1996); see also McConathy v. McConathy, 632 So. 2d 1200 (La. Ct. App. 1994) (student loan was a community debt).
Tax obligations - A tax debt for community income can be classified as a community debt even if the IRS has found one party to be an "innocent spouse" who is not liable for the debt. In re Marriage of Hargrave, 36 Cal. App. 4th 1313, 43 Cal. Rptr. 2d 474 (1995). Taxes on nonmarital property are a nonmarital debt. In re Marriage of Toole, 372 Ill. App. 3d 607, 653 N.E.2d 456 (1995).
Tax shelter liabilities - Liabilities associated with tax shelter investments acquired during the marriage should be classified as marital property. Zelnik v. Zelnik, 169 A.D.2d 317, 573 N.Y.S.2d 261 (1991).
Liability for fraud - The husband's settlement obligation, in connection with allegations of Medicare fraud, was not a marital debt. Harasym v. Harasym, 418 Pa. Super. 486, 614 A.2d 742 (1992). A fraud judgment against the husband was a distributable debt to the extent it reflected actual damages, because the parties had shared in the gains of the conduct; however, the debt was nonmarital to the extent it reflected punitive damages and court costs. In re Marriage of Kimm, 260 Mont. 479, 861 P.2d 165 (1993).
Wedding debts - Debts incurred for the parties' wedding are a marital liability. Osman v. Keating-Osman, 521 N.W.2d 655 (S.D. 1994).
Dentist's bill - The husband did not meet his burden of showing that a debt for his dental work was for the joint benefit of the parties so as to justify classifying it as a marital debt. Becker v. Becker, ___ N.C. ___, 489 S.E.2d 909 (1997).
Debt for children's college costs - A contractual obligation to prepay college tuition for the parties' children was a marital liability which could be assigned as part of the parties' property division. Walton v. Walton, 657 So. 2d 1214 (Fla. Dist. Ct. App. 1995). The husband's assumption of his son's student loans was not a marital debt. Forester v. Forester, 174 Wis. 2d 78, 496 N.W.2d 771 (Ct. App. 1993).
II. Distributing Debts
General Principles. Most states take the view that the responsibility for marital debts must be allocated between the divorcing spouses as part of equitable distribution. E.g., Pott v. Pott, ___ N.C. App. ___, 484 S.E.2d 822 (1997) (failure to distribute defendant's obligation on note executed in connection with withdrawal from accounting partnership was error).
The responsibility for debts must be apportioned pursuant to the same considerations of fairness and equity which apply to the distribution of assets. Beattie v. Beattie, 650 A.2d 950 (Me. 1994) (same factors apply in dividing debts and assets); Hardy v. Hardy, 311 S.C. 433, 429 S.E.2d 811 (Ct. App. 1993) (not permissible simply to assign each spouse responsibility for debt in his or her name); see also In re Marriage of Dunseth, 260 Ill. App. 3d 816, 633 N.E.2d 82 (1994) (trial court erred by ordering that wife would not be responsible for any part of the parties' staggering debt).
An item of debt associated with a particular asset should generally be distributed to the spouse who receives the asset. Mondelli v. Howard, 780 S.W.2d 769 (Tenn. Ct. App. 1989) (business debts should follow business assets).
A secured debt must generally be offset against the value of the encumbered asset. Brooks v. Brooks, 911 S.W.2d 631 (Mo. Ct. App. 1995). But see Williamson v. Williamson, 402 Pa. Super. 276, 586 A.2d 967 (1991) (offset not required as long as debt is taken into account and distribution is equitable); Watson v. Watson, 837 P.2d 1 (Utah Ct. App. 1992) (offset not required where proceeds of secured home loan were not used for home-related purposes).
Where none of the debts is identified as a lien or mortgage on any particular item, it is proper to distribute marital debt by apportioning individual items rather than deducting them from the value of the marital property. Smith v. Smith, ___ S.C. ___, 486 S.E.2d 516 (Ct. App. 1997).
A Texas appeals court held that the trial court has the authority to divide community debts even if community assets are insufficient to pay them, thus requiring spouses to expend separate funds to repay community obligations. Johnson v. Johnson, 948 S.W.2d 835 (Tex. App. 1997).
Factors Which Affect Distribution. When distributing marital debts, courts appear to consider these factors important:
Who incurred the debt and who benefited from it? See Gallant v. Gallant, 945 P.2d 795 (Alaska 1997) (permissible to distribute debt to husband where he was responsible for creating it and kept wife in the dark about it); Bliss v. Bliss, 493 N.W.2d 583 (Minn. Ct. App. 1992) (trial court did not abuse its discretion by assigning wife the entire responsibility for debts she incurred during separation).
Is the debt related to a particular asset? See Roberts v. Roberts, 670 N.E.2d 72 (Ind. Ct. App. 1996) (proper to allocate husband's student loans to him); Fiedler v. Fiedler, 230 A.D.2d 429, 646 N.Y.S.2d 839 (1996) (trial court's decision to make husband solely responsible for tax liabilities incurred through his investments in questionable tax shelters would not be disturbed).
Which spouse is best able to assume and repay the debt? See Tisdale v. Tisdale, 127 Idaho 331, 900 P.2d 807 (Ct. App. 1995) (assigning more debts to party with greater ability to repay).
Is repayment speculative or under the control of one spouse? See Held v. Held, 896 S.W.2d 709 (Mo. Ct. App. 1995) (trial court did not abuse its discretion by assigning husband responsibility for any indebtedness owed to his parents for marital home).
Go to: Debts 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© 1996-2010. All rights reserved by Divorce Source, Inc.
Comments & Suggestions? or Recommend This Page to a Friend!