Is wife’s half of husband’s retirement benefits a property interest of hers or a debt dischargeable in bankrupt?
Although the decision was based on the Bankruptcy Code as it existed in 1990, the case of Brogan v. Brogan, 31 Va. App. 769, 525 S.E.2d 618 (Va. App. 2000), which held that the wife’s interest was a property interest, not a debt dischargeable in bankruptcy, is historically useful for its analysis of a debt in the context of family law issues.
As discussed in Brogan, before the 1994 amendments to the Bankruptcy Code, spousal and child support obligations were the only marital debts not dischargeable in bankruptcy. The inquiry was whether a given debt was “in the nature of alimony or support” or was a division of property. The 1994 amendments added Section 523(a)(15) in an attempt to prevent spouses from discharging sums other than alimony owed to the other spouse under a property settlement agreement. Brogan v. Brogan, 31 Va. App. 769, 778, 525 S.E.2d 618, 623 n.5. With the addition of Section 523(a)(15) in 1994 until its revision in 2005, nonsupport family law debts could be declared to be nondischargeable in Chapter 7 with the filing of an adversary proceeding within 60 days of the meeting of creditors unless the debtor could not reasonably pay the debt or the benefit of the discharge outweighed the harm to the spouse, former spouse or child.
The current statutory basis for the dischargeability of family law debts in consumer bankruptcy cases after the wholesale revision of the Bankruptcy Code following the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is contained in Title 11 of the U.S. Code, in several sections as follows: Sections 101(14A) defining “domestic support obligation”, Section 523(a)(5) and (15), containing “Exceptions to Discharge”, and Sections 727, 1141 and 1328(a) delineating the discharge in bankruptcy under the various chapters.
In a nutshell, after the 2005 amendments to the Bankruptcy Code, “domestic support obligations” are not dischargeable in chapters 7 or 13. Some family law debts that are not domestic support obligations may be dischargeable in chapter 13, but may not be discharged in a chapter 7 case or with a chapter 13 hardship discharge.
In Brogan, the husband and wife had entered into a written stipulation agreement (also known as a separation agreement or property settlement agreement) under which wife became entitled to one-half of husband’s gross retirement funds, to be paid directly to wife. The agreement was incorporated into the final decree of divorce between the parties. The husband filed chapter 7 bankruptcy two months later and received a discharge of his debts. Nine years later, the wife filed a petition for an order to show cause in the Virginia Circuit Court that granted the divorce because she was not receiving her share of her former husband’s retirement funds. The husband claimed that the obligation was a debt that had been discharged in bankruptcy and that the Virginia divorce court lacked jurisdiction, or the power to hear, the dischargeability of the obligation. The divorce court judge held that the obligation was not a debt subject to discharge in bankruptcy, but was instead a division of property. The Virginia Circuit Court judge entered judgment in favor of the wife for the disputed amount and found husband in contempt for his failure to pay the disputed amount.
On appeal, the Virginia Court of Appeals held that the bankruptcy court and Virginia Circuit Courts have concurrent jurisdiction to determine whether an obligation was a debt under the bankruptcy code and whether it arose pre-petition (before filing) or post-petition (after filing), citing 28 U.S.C. 1334(b).
Brogan v. Brogan, 31 Va. App. 769, 774, 525 S.E.2d 618, 621.
The Virginia Court of Appeals recognized that the bankruptcy courts have exclusive jurisdiction over the dischargeability of debts based on fraud, false pretenses, use of a false financial statement in writing, larceny, embezzlement, and willful and malicious injury which require the filing of a complaint under Section 523(c).
In this case, the appeals court held that the husband’s obligation was not a debt within the meaning of the bankruptcy code and that filing bankruptcy could not give the husband greater interests in the retirement plan than what he had before filing. Citing Section 541(d) of the Bankruptcy Code, the court concluded that Virginia law governed what property interests the spouses had in the retirement funds.
In some states, courts have imposed a constructive trust upon retirement funds held by a spouse for the benefit of the other spouse. In Brogan, the court ruled that the language in the agreement that wife’s share was to be paid directly to her “was sufficient under Virginia law to give wife a separate property interest in husband’s future benefits.” Brogan v. Brogan, 31 Va. App. 769, 776, 525 S.E.2d 618, 622. The court also ruled, alternatively, that the wife’s share was not a pre-petition debt because the payments were not yet due and payable at the time the bankruptcy was filed.
You should consult with your Virginia bankruptcy or divorce lawyer concerning the dischargeability of family law debts in bankruptcy.