Sunday, August 2, 2009

What happens when your former spouse files bankruptcy on a marital debt?

First that not all debts can be gotten rid of in bankruptcy. For family law cases, these parts of 11 U.S.C. 523(a) (that is the formal citation to the Bankruptcy Code) set out the non-dischargeable debt:

(5) for a domestic support obligation;


(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;
Yes, (a)(15) is a bit more complicated than (a)(5). However, (a)(5) has a bit of strangeness for those thinking of support in terms of Indiana law. In the bankruptcy court, support includes more than child support but also maintenance and attorney fees.

This passage from In Re Bertram, a case from The Southern District of Indiana heard by Judge Metz in 2001, gives a good overview of how one does a case under (a)(15):
7. Debts that arise from a divorce or separation agreement are nondischargeable if they are in the nature of support, alimony or maintenance (~523(a)(5)). If they are in the nature of a property settlement, or are debts that result from the division of marital assets, they are dischargeable under Section 523(a)(5), but are nonetheless nondischargeable under Section 523(a)(15) unless it can be proven that one of two conditions under subparts (A) and (B) of that section exists. The Crosswhite court recognized that §523(a)(15), like §523(a)(8), is structured in the "exception within an exception" format, and therefore, the burden of proving dischargeability falls on the debtor. Crosswhite, 148 F.3d at 886, fn 9.

8. Therefore, the only burden of proof to be carried by a creditor seeking a
determination of nondischargeability under Section 523(a)(15) is the initial burden of proving that the debt owed to the former spouse is not in the nature of alimony, support or maintenance (because, if it were, it would be nondischargeable under Section 523(a)(5)) and that it was incurred by the debtor in the course of the divorce or in connection with the divorce decree or similar agreement. Once the creditor carries its burden as described above, the burden shifts to the debtor to establish dischargeability of the debt by proving one of the two prongs under Section 523(a)(1 5), namely: (1) the debtor does not have the ability to pay the debt; or, if the debtor is shown to have the ability to pay the debt, then (2) the benefit of the discharge to the debtor is greater than the detriment of the discharge to the non-debtor spouse. Crosswhite, 148 F.3d at 884-885. See also, Strayer v. Strayer, NO. 95-71 72-RLB-7, Adv. Pro. 95-535 at p7-8 (Bankr. S.D. Ind., April 10, 1996); Smith v. Brock, No. 96-2647-RLB-7, Adv. Pro. 96-30 1 at p.5-6 (Bankr. S.D. md., Mar. 13, 1997).
The burden then falls onto the debtor to show the hardship or a greater detriment tan to the creditor. In this case, the debtor won:
18. The Court concludes, that, In light of the evidence and the testimony that has been presented in this case, it is clear that even if the Defendant had not met his burden under §523(a)(15)(A), and had the ability to pay the Award, the benefit to him in discharging the Award would outweigh the detriment to the Plaintiff in not being paid the ward. Accordingly, the Court concludes that the Award is dischargeable under §523(a)(1 5).
For a similar case from Judge Dees of United States Bankruptcy Court for the Northern District of Indiana, see In Re Burt (2007).

Second, the Bankruptcy Procedure must be followed closely. If you get a Notice of Bankruptcy, you need to call an attorney immediately. (Well, as soon as possible during business hours). If an objection is not made by the time listed in the Notice of Bankruptcy, there is no relief from the Bankruptcy Court.

For an exception to this, see
In Re Burt.

I am licensed to practice in the Northern and Southern Districts of Indiana. However, I do restrict my appearances in the Southern District to Indianapolis and the Northern District to Fort Wayne.

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