When the Former Spouse Files for Bankruptcy
By Christopher M. Kennedy

It is the phone call that all family law attorneys dread. A client calls and she just received notice that her former husband has filed for bankruptcy. Besides the normal questions, of why did she receive notice and what does this mean, she wants to know can the creditors collect his obligations from her. What about the court order that provided that he was to pay this debt? The purpose of this article is to address those concerns.

CLASSIFYING THE DEBT

It is well-known that debts owed to a spouse, former spouse, or children that were incurred for alimony or maintenance of the spouse, former spouse, or child are not dischargeable if incurred as the result of a separation agreement or under the laws of the state or territory.1 The question becomes how to classify the debt. If the debt is for child support or alimony payments, then the debt is nondischargeable. If the debt is property settlement the debt then is dischargeable.

This federal line-drawing left the state courts to their own devices. Attorneys and courts attempted to bankruptcy-proof their findings by inserting language that the payment of debts for the equalization of a property settlement was in the nature of support or alimony, thereby making these debts nondischargeable. These arbitrary labels are not binding on the bankruptcy court. The bankruptcy court will look beyond the labels in the document to determine the true intent of the parties or court.2

The inquiry into whether a debt is nondischargeable as being support, maintenance or alimony involves an inquiry into the three elements required by the statute. Is the debt in the nature of alimony, maintenance or support? Is the debt owed to a spouse, former spouse, or child? Was the debt incurred as part of a separation, divorce, or property settlement?3 In reviewing the debt, the court should end its inquiry if the debt is labeled as support or maintenance and the parties intended that the debt would be for support, maintenance or alimony. If the nature of the obligation is unclear then the bankruptcy court should review the facts and circumstances and determine 1) was it the intent of the parties to create a support obligation and 2) are the payments of the parties in substance support payments.4

The label that is placed on the payment by the state court or the parties is not necessarily determinative of the actual nature of the obligation. The Bankruptcy Court will need to take a deeper review. It will need to examine the nature of the debt. It is a good indication that the obligation is in the nature of support or maintenance if it was for a necessity of life.5 This may include the payment of such expenses as mortgages or health insurance.

If the Bankruptcy Court determines that the debt is in the nature of alimony, maintenance or support, is owed to a spouse, former spouse or child, and it was the intent of the court or the parties to have the debt be alimony, maintenance or support, then the debt would be nondischargeable. If the court finds that the debt does not meet these elements then the debt would still be discharged by the bankruptcy. This would allow the debtor spouse to discharge property settlements and other debts that he may have incurred to his spouse.

1994 CODE AMENDMENTS

This used to be a complete bar to recovery for the spouse of debtor, then in 1994 the Bankruptcy Code was amended to include 11 U.S.C. 523(a)(15). This section of the Bankruptcy Code makes nondischargeable those obligations that the debtor incurs pursuant to a divorce decree or separation but that are not exempted from discharge in Section 523(a)(5). This would be of great help to the spouse if Congress did not include limiting language that provides that the debt would still be dischargeable if the debtor does not have the funds or property to pay the debt and still provide for the support of the debtor or dependents,6 the money is needed for the continuation of a business, or discharging the debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child.7

The exemption provided under 11 United States Code Section 523(a)(5) is specific and narrow. If the obligation meets the definition as provided by the statute the debt is nondischargeable. The exceptions to this section are narrow. Section 522(a)(15) is broadly applicable.8 Any debt that is incurred in the dissolution process is covered. The statute, however, leaves open the real possibility that the debt may be discharged.

The statute opens the door for the former spouse to litigate the issues but the exceptions themselves are broad enough to invite litigation. One of the main concerns that any attorney has is the time frame. Debts under 11 U.S.C. 522(d)(15) are discharged unless the creditor requests otherwise and the court orders that the debt is not discharged.9 The action to determine the dischargeability of the debt must be filed within 60 days following the meeting of creditors. If the action is not brought in the time frame the debt is discharged.

Once an action is brought then the bankruptcy court will have to review the merits of the matter. The court will have to weigh the totality of the circumstances to determine whether the debt should be discharged.10 The nondebtor spouse has to show that debt was incurred as part of a dissolution or separation and that the statute was applicable. Once that has been shown the debtor has to show that one of the exceptions applies to him.11 For example, the debtor may show that he is unable to pay the debt. The burden is on the debtor to establish this element. The court will normally consider such factors as the amount of the debt, proposed repayment plans, the value and nature of property retained by the debtor, the amount and reasonable expenses of the debtor and the debtor's dependents, and the costs of operating the debtor's business.12 The court is also able to review the chances that the debtor will be able to pay the debt or a portion of the debt in the future.13

In many cases the crucial determination is the relative harm issue. Is the discharge of the debt a greater benefit to the debtor than the harm it would cause to the spouse, former spouse, or child? The debtor has the burden of proving that the benefit that he will receive outweighs the harm.14 The bankruptcy court will again use the totality of circumstances test.

CONCLUSION

The mere fact that a client's former spouse files for bankruptcy protection does not mean that your client has no hope. A determination has to be made as to the nature of the debt that is owed to your client. If it is maintenance, alimony or support the debt is nondischargeable. If the debt is for property settlement the analysis is more difficult. The debt may be nondischargeable, but an action must be filed with the bankruptcy court and the court will have to rule on that motion. The court will consider the nature of the debt, the financial condition of the debtor, and compare the benefit of discharge to the harm that the nondischarge would cause. The court will make a determination on a case-by-case basis.

NOTES
1. 11 U.S.C. §523(a)(5).

2. Tilley v. Jesse (In Re Tilley), 789 F.2d 1074, 1078 (4th Cir. 1986).

3. Kolodziej v. Reines (In Re Reines), 142 F.3d 970,972 (7th Cir. 1998).

4. Fitzgerald v. Fitzgerald (In Re Fitzgerald), 9 F.3d 517 (6th Cir. 1993) and In Re Young, 35 F.3d 499 (10th Cir. 1994).

5. Williams v. Williams (In Re Williams), 703 F.2d 1055 (8th Cir. 1983).

6. 11 U.S.C. §523(a)(15)(A).

7. 11 U.S.C. §523(a)(15)(B).

8. In Re Short, 232 F.3d 1018, 1022 (9th Cir. 2000) and In the Matter of Gamble, 143 F.3d 223 (5th Cir. 1998).

9. Federal Rules of Bankruptcy Procedure 4007(c).

10. In Re Crosswhaite, 148 F.3d 879 (7th Cir. 1998).

11. Oswald v. Asbill (In Re Asbill), 236 BR 192 (Bankr D.S.C. 1999).

12. In Re Smither, 194 BR 102 (W.D. Ky. 1996).

13. In Re Huddleston, 194 BR 681 (N.D. Ga. 1996).

14. In Re Anthony, 190 BR 429 (N.D. Ala. 1995).

CHRISTOPHER M. KENNEDY is a partner in the law firm of Kennedy & Kennedy in Mankato, Minnesota and is the president of the 6th District Bar. He practices in the areas of debtor-creditor rights, bankruptcy, and municipal litigation.