If a soon-to-be debtor is divorced or is going through a divorce, one of the things that a bankruptcy practitioner must look at is the property settlement agreement, the notice of division or property, whatever you want to call it. The bankruptcy attorney better know what is in that document and what their client owes under that document. Because nothing will derail a case faster than an upset ex-spouse who thinks their ex filed bankruptcy solely to avoid payment.
Often, many things on their face will not look like alimony, maintenance or support and an inexperienced bankruptcy practitioner may find themselves in trouble when an obligation is determined to be in the nature of alimony, maintenance or support. There was just such a situation in the June 2014 In re Thomas, 2014 FED App.0004P (6th Cir. 2014) case.
A brief summation of events is as follows. The Debtor (ex-husband) and the Creditor (ex-wife) were married and divorced in 2003. At this time, child support was above the Kentucky guidelines because the Creditor (ex-wife) was paying the first and second mortgages on the home and agreed to hold the Debtor (ex-husband) harmless. The Debtor was supposed to quitclaim his interest in the property after the divorce, but did not. The parties remarried and divorced again in 2007. But this time, their property settlement agreement was slightly different. Child support was more in line with Kentucky guidelines and the two parties agreed to SPLIT the second mortgage. The first mortgage went to the Creditor (ex-wife) and she agreed to hold Debtor (ex-husband) harmless. There was no spousal support awarded in either divorce. After the second divorce the Debtor quit-claimed his interest in the property to the Creditor (his ex-wife, not the mortgage company). In between marrying and divorcing, in 2004 Auto Acceptance filed a judgment lien against the Debtor – guess what – it went against the home we was supposed to quitclaim to wife. The judgment lien attached prior to 2nd divorce, but was not addressed in the 2007 property settlement agreement. The Creditor (ex-wife) sells the home in 2008, but the proceeds were not enough to cover the judgment lien. Creditor (ex-wife) negotiated with Auto Acceptance and paid $5,000 from the sale proceeds to have the lien released. In January 2009, state court enters order that the Defendant (now the Debtor in bankruptcy) shall reimburse the plaintiff (now the creditor in the bankruptcy) $7,500 for his interest in the 2nd mortgage and shall reimburse Plaintiff $5,000 for the removal of the judgment lien
Debtor files Chapter 13 – UH OH! This is the SUPER DISCHARGE where all split debts in a property settlement agreement are discharged upon completion of the plan. Looks like our creditor ex-wife is in trouble. BUT NOT SO FAST!!! Our creditor/ex-wife was smart! She filed a proof of claim for the debts and categorized them as a priority claim in the nature of alimony, maintenance, or support. This makes the debt nondischargeable!! The Debtor objected to this treatment of the claim. The Thomas Court used In re Calhoun, 715 F.2d 1103 (6th Cir. 1983) and the four-part test to determine if this obligation was actually in the nature of alimony, maintenance or support. In other words, did it appear dischargeable on its face, but closer examination show that it was in fact nondischargeable? The Thomas Court ultimately decided that these debts were in the nature of alimony, maintenance or support.
The morale of this is clear. If you are contemplating filing bankruptcy and have been divorced, make sure to disclose this to your bankruptcy practitioner. A review of this situation is needed. And if you are an ex-spouse who is owed money, so not think there is no remedy for you. You also need an experienced bankruptcy practitioner to review the items and help you determine if representation in your ex-spouse’s bankruptcy is needed.