The Law Office of Kurt H King

January 16, 2013

Discharge in Bankruptcy Of Debts Ordered Paid in a Divorce or Legal Separation Setting

Filed under: Divorce,Family Law,Litigation — kurthking @ 11:03 pm
Tags: , ,

While no longer “breaking news,” cases continue to proceed to court over what happens to an ex-spouse who fails to pay debt he/she was ordered or agreed to pay in connection with a divorce or legal separation proceeding under Missouri law.

One such recent case is Henderson v. Henderson, No. ED98357 (Eastern District Slip Opinion Filed December 26, 2012).  There the former wife filed a motion to hold her ex-husband in contempt for failure to pay a line of credit debt that he agreed to pay in a dissolution settlement agreement and the resulting court judgment of dissolution of marriage.   Instead of paying off the debt as ordered, this man filed Chapter 7 bankruptcy and was granted a discharge of that debt–meaning that the creditor could no longer collect against the ex-husband.

But the creditor could proceed against the former wife to the extent that she was jointly obligated on the debt.  The opinion indicated that the line of credit creditor was attempting to collect from wife but apparently had not yet been successful in those attempts.  There is no mention of the creditor having sued or obtained a judgment against the former wife.  However, the former wife requested an award for attorney fees and costs in her case to hold her ex-husband in contempt of court.

At the trial, the judge  found that the ex-husband was not in contempt for non-payment of the line of credit indebtedness because, “the balance due US Bank is not owed by [Husband] to [Wife] or to US Bank.”  (See page 4.)  Nor did the trial court award attorneys fees and costs on the former wife’s claim for such in the contempt case.  On the other hand, the trial court did order the ex-husband to pay wife [not US Bank]  $9,600 which turned out to approximate roughly half of the balance of the line of credit discharged in the ex-husband’s Chapter 7 bankruptcy.

Both parties appealed the trial court’s decision, the ex-husband complaining that he should not have to pay former wife $9,600 when she never paid a dime of the balance to US Bank on the line of credit.  And, wife of course charged the trial court with error in not holding the ex-husband in contempt to force him to pay her all the line of credit debt and her attorneys fees and costs incurred in the contempt case.

On appeal, the Eastern District easily found in favor of  the former wife in holding the entire Line of Credit is nondischargeable pursuant to 11 USC section 523 (a)(15) which provides that a Chapter 7 bankruptcy discharge–

“[D]oes not discharge an individual debtor from any debt–

. . .

(5) for a domestic support obligation;

. . . [or]

(15) to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor 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, or a determination made in accordance with State or territorial law by a

governmental unit.”

And this is apparently true even though the ex-spouse fails to file any objection to discharge of the marital debt in the bankruptcy case as the former wife failed to file any such objection to her ex-husband’s bankruptcy case.

The appellate court then summarily rejected the ex-husband’s argument that the former wife failed to make a sufficient case of contempt, and ordered the case sent back to the trial judge for reconsideration of whether husband was in fact in contempt of court and the former wife’s attorney’s fees.

So, this case makes clear that one spouse–the former wife in this case–need not file objection in the other spouse’s bankruptcy case in order to prevent discharge of such marital debt.  Rather, the “marital debt” is not dischargeable even when no objection to discharge is filed.

And while that reasoning seems clear, what about the holding that the debtor owes his or her former spouse the full amount of the discharged debt when that former spouse has not paid a penny of the debt in issue and has not even been sued to collect the debt, and there is no judgment against her to pay any of the debt?  For if the ex-husband now pays the full amount of the debt to the former wife  to avoid jail for contempt of court, there remains no assurance that former wife will use all or even part of those monies to pay the creditor.  Or, perhaps, the former wife negotiates with the marital debt creditor so that she pays only part of the debt in return for a full release of the debt, and by so doing pockets some of money for herself.  The trial court in this case may have been best situated to assess how “judgment proof” the former wife is and craft judgment accordingly so that a windfall to the former wife did not result at the unfair expense of the ex-husband.

As a practical matter, the ex-husband may find himself better off to negotiate quickly with US Bank to pay 50 cents on the dollar, for example, in order to get a full release of himself and his former wife on the marital line of credit debt.  Maybe that is the real lesson in this case–assuming he has the money to pay.

Kurt H. King

Law Office of Kurt H. King, 20 E. Franklin, Liberty, Clay County, Missouri; 816.781.6000

Domestic Relations Law and General Practice–Divorce, Modifications, Paternity, Child Support, Custody, & Visitation

http://www.kurthking.com

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