One Discharge, Two Spouses, And Third Party Creditors

crayons Flickr Randy HeinintzThe classic bankruptcy family law conundrum is whether to file bankruptcy before or after a divorce.

We think about about bankruptcy addressing the claims of third parties against the spouses.

But consider the impact of a bankruptcy discharge granted to one spouse prior to the resolution of the divorce.

What are the options and alternatives for the non filing spouse?

Our local Inn of Court considered this question with a local family law judge, a room full of bankruptcy practitioners and the two lawyers who’d argued this question to a family judge.

The facts were these:  during the course of a divorce, Wife filed Chapter 7 and received a discharge.  A year and a half later, as the division of assets and debts was at issue, Husband sought an order that Wife indemnify him from a joint debt.

Query:  could the family court order the debtor to indemnify the ex spouse with respect to a debt for which she had discharged her liability?

Full disclosure:  I represented Wife in the bankruptcy case and argued this issue to the family court.

I analyzed an indemnity obligation as running afoul of the discharge.

Husband’s counsel argued that a Chapter 7 discharge could not have discharged a debt she owed to her ex with respect to marital debts.

Afterward, both bankruptcy lawyers admitted that they had never considered the arguments made by the other.

The court held

The family law judge held for Wife:  her bankruptcy discharge barred the creation of an indemnification obligation with respect to a discharged debt.

The court relied on a 9th Circuit BAP decision Heilman.

What was startling to me was that this issue hadn’t been conclusively resolved by the courts.  After all, debtors have been marrying and divorcing for a long time.

Practice pointers

In candor, I wish I had solid practice pointers on this issue.

There are old cases that approach the issue of obligations between spouses from the point of view:  when does the claim of one spouse against the other arise.  Maybe it doesn’t arise before marital discord, or the initiation of a divorce action.  Yet in Heilman, the divorce was filed months after the bankruptcy.

The uncertainty here may argue that either the spouses file a bankruptcy together, or at least, that they both file.  That eliminates any disparity in the post divorce obligations to third parties of the spouses.

If the divorce had been completed before Wife filed her Chapter 7, any order for indemnification would have been non dischargeable.  If such orders had been made in the divorce, we might have opted for Chapter 13, where non support obligations to a spouse are dischargeable.

I asked the pupilage group whether an uneven division of the marital property in my case would have been a permissible approach to the disparities created by the discharge of one spouse.  Our collection of lawyers and judges hemmed and hawed.

Welcome to the strange and wonderful world of family law and bankruptcy.

The Bankruptcy Family Law Series:  ♦ Spouses as source of Conflicts   ♦ Starting with support  ♦ Shadow players with support claims   ♦ Non support debts & discharge   ♦When the stay rules change

Image courtesy of Flickr and Randy Heinitz

 

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