Special Rules for Dischargeablility of Debts Created in Marital Settlement Agreements and in Divorce Judgments

By Donald A. Hayes, Attorney at Law


 

Until recently, debts incident to marriage dissolution and based upon a division of marital property could be discharegable in the debtor spouses Chapter 7 Bankruptcy. For example, Husband takes the former family residence with an equity value of $50,000 and is ordered to pay Wife $25,000 in the divorce judgment, Aas and for an equalization of community property and debts@. Now after the deed is conveyed to Husband and Wife no longer has title to the property, Husband files a Chapter 7 Bankruptcy seeking to discharge the $25,000 debt to Wife.

Prior to the change in the law in 1994, Husband under this example would be able to discharge the full $25,000 debt to Wife, and keep the entire equity in the former family residence. Wife could have protected herself by securing the $25,000 obligation created in the divorce Judgment with a note recorded simultaneously with the transfer of her interest in the property to Husband. But in this example she didn=t and Husband discharged his unsecured obligation to her.

However, effective October 24, 1994 Congress enacted changes to the Bankruptcy Code when it added an additional exception to the discharge rules contained in Section 523 (a) (15). That section provides that obligations incurred in the course of divorce or separation, or in connection with a separation agreement, divorce decree or other order of a court, are not discharegable unless (A) Athe debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary for the 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@; or, A(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, a former spouse, or child of the debtor@.

Please be acutely aware that the burden is on the non-debtor spouse to raise the nondischargeability issue by timely initiating an adversary proceeding in the bankruptcy court, within 60 days after the first date scheduled for the meeting of creditors. If the non-debtor spouse does not do so, he or she will lose their rights to object and the obligation owed to them will be automatically discharged.
Congress did not make the ‘523 (a) (15) exception to discharge applicable in Chapter 13 Bankruptcies. Thus, unless the debt is deemed Ain the nature of support@ or within the ambit of another dischargeability exception, property settlement and property division debts can be discharegable in Chapter 13 proceedings even though they would not be discharegable had the debtor filed a Chapter 7 or Chapter 11 case!