Sterling Law Office

Given the current economic climate, many divorce cases now involve more debts than assets.  Many of these debts are jointly incurred, e.g., mortgages, credit cards, car loans.  Often, a divorce will result in one spouse being ordered by the Court in a Judgment of Divorce to make all payments on a particular joint debt.  Yet the other spouse remains liable to the third party on that debt if the payor spouse defaults.  Indeed, in the emotionally charged atmosphere of a divorce, many parties secretly harbor the intention to default on such a debt if ever ordered to pay, under the impression that filing for Bankruptcy will “wipe away” their obligation and allow them to saddle their ex-spouse with the debt. Inevitably, some of these parties follow through with their intentions.  For these parties, a rude awakening awaits in Bankruptcy Court, where the lender and/or the ex-spouse may object to the debt as nondischargeable.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (”BAPCPA”), a complaint for nondischargeability is governed by the provisions of § 523 of the United States Bankruptcy Code as they existed after BAPCPA’s passage. Section 523(a)(15) provides in relevant part that:

(a) A discharge under section 727, . . . of this section does not discharge an   individual debtor from any debt —

(15) to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5)[domestic support obligation] 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[.]

The changes made to § 523(a)(15) by BAPCPA removed the balancing language that allowed a debtor to discharge a non-support divorce debt if the debtor could demonstrate that the debtor did not have the ability to pay the debt or the benefit of discharge to the debtor is greater than the detriment to the former spouse. It is no longer necessary for the court to make such a determination. The plain language of the statute now provides that all debts which qualify as domestic support obligations are nondischargeable.

In summary, to be excepted from discharge under this provision, the debt must: (1) be to a spouse, former spouse, or child of the debtor; (2) not be of the type described in § 523(a)(5), i.e. not a domestic support obligation; and (3) have been incurred in the course of a divorce or separation or in connection with a separation agreement, divorce, decree, or other order of a court.

In Michigan, the controlling Court on this issue is the Sixth Circuit Federal Court of Appeals.  The Sixth Circuit has ruled that a divorce judgment imposes upon a payor spouse the obligation to indemnify a former spouse if one of the parties’ joint creditors should call upon that spouse to pay a debt that the payor spouse was ordered to pay.  Gibson v. Gibson (In Re Gibson), 219 B.R. 195 (6^th Cir. BAP 1998).   The Gibson panel found that when a debtor incurs an obligation to pay a joint debt as part of a divorce proceeding, a former spouse could, by enforcing the terms of the divorce judgment, compel the debtor to honor the obligation, even in the absence of a hold-harmless clause and even though the debt was payable to a third party.

Therefore, for a person facing potential divorce and considering a Bankruptcy, it is absolutely essential to file for Bankruptcy before a divorce is final–otherwise, debts that might otherwise be discharged in a Bankruptcy may be transformed into non-dischargeable debts that can burden a payor spouse long after the ink is dry on a Judgment of Divorce.

Posted March 5, 2010