Can a Virginia divorce judge allocate the entirety of a bankruptcy debt to the husband in equitable distribution when the parties’ separation agreement does not mention the chapter 13 bankruptcy proceeding, but provides that each party would be responsible for debts incurred by the parties prior to their separation?

Can a Virginia divorce judge allocate the entirety of a bankruptcy debt to the husband in equitable distribution when the parties’ separation agreement does not mention the chapter 13 bankruptcy proceeding, but provides that each party would be responsible for debts incurred by the parties prior to their separation?

No, according to the unpublished opinion of Strickland v. Strickland, record No. 0314-07-2 (Va. Ct. App. 2007), where the Virginia Court of Appeals reversed the Chesterfield County Circuit Court judge’s ruling found that the chapter 13 bankruptcy debt was solely husband’s responsibility.

The parties married on May 12, 1990, and in 1996, they had a child.  Throughout the time of the marriage both parties worked, but the husband brought in a more substantial income. In 2002, the parties filed a joint petition for a Chapter 13 bankruptcy. Under the plan, the parties’ joint federal taxes, utilities bills, home mortgage, credit cards and other debts were consolidated, and the schedule set the repayment amount at $500 per month (taken directly from the husband’s paycheck) until the $25,000 had been repaid. The husband had continued to make payments toward the debt.

On November 11, 2003, the husband, anticipating separation with the wife, committed in writing that he would put their home in the wife’s name, pay $1,000 per month for the wife and daughter, remove the wife’s name from the car loan, give his wife full custody of their daughter, and “pay all bankruptcy.”  A month later, the parties separated, and they entered in an “agreement and stipulation in accordance with section 20-109 and 20-109.1 of the Code of Virginia” (the Agreement), which the wife’s attorney had prepared.  The terms of the Agreement included provisions for child and spousal support at $500 per month for each. Furthermore, the parties agreed they would be “fully and individually responsible for…any debts incurred by the parties prior to their separation,” but it also provided that the husband would assume sole possession of their jointly owned 2002 Kia Sportage and assume its lien while the wife would be removed from both the title and the lien. The Agreement, however, remained silent on the issue of the parties’ joint bankruptcy debt.

From December 2003 through October 2004, the husband paid the wife $1,000 per month for support. After that time, however, the husband notified the wife that he would decrease his monthly payments, withholding an amount that would offset her portion of the bankruptcy debt retroactive to December 2003. In 2004, however, the husband’s Kia was repossessed for failure to repay the loan, and subsequently, the bankruptcy plan was modified to include the $5,972.38 debt from the Kia.

The wife filed a complaint seeking a divorce in July of 2006, and in her complaint, she asked the trial court to affirm, ratify, and incorporate the Agreement into the divorce decree. In addition, she filed a motion to establish child and spousal support arrearage, based on her claim that the husband had improperly reduced his payments of $1,000 per month since October 2004. In response, the husband filed a cross-complaint, arguing that the wife had violated the Agreement because she had failed to pay her portion of their joint bankruptcy debt, and he asked the court to not approve the Agreement with respect to spousal support, or in the alternative, to credit him the wife’s portion of the bankruptcy debt. The trial court granted the parties’ divorce in November 2006 and ordered that the Agreement be ratified and incorporated but not merged into the final decree; however, the Court made no reference to the bankruptcy debt, leaving the discharge entirely to the husband.  In January 2007, the Circuit Court had a hearing to address issues of the support payments since October 2004, whether the bankruptcy debt was marital, and if it were, then what offset the husband would be permitted. At the hearing, the Chesterfield County Circuit Court judge found that the bankruptcy debt was the husband’s “sole debt,” that he was not permitted an offset against his support obligations, and that the support order was retroactive to the date of the Agreement.

On appeal, the husband alleged that although the $5,972.38 from the Kia was properly allocated as separate debt, the rest of the debt was joint marital debt. Moreover, since the Agreement had provided that the each of the parties would be responsible for “debts incurred by the parties prior to their separation,” the trial court erroneously attributed all the bankruptcy debt to him.  In determining the issue, the Court of Appeals examined Virginia Code §20-109.1, which provides that the parties may affirm, ratify, and incorporate a valid agreement into the final divorce decree. In addition, the appeals court noted that once incorporated, an agreement becomes “a term of the decree … enforceable in the same manner as any provision of such decree.” Campbell v. Campbell, 32 Va. App. 351, 528 S.E.2d 145 (2000).  The husband alleged that the evidence did not support the trial court’s determination of the bankruptcy debt as his sole responsibility. See Stumbo v. Stumbo, 20 Va. App. 685, 460 S.E.2d 591 (1995) (holding that the allocation of debt as either marital or separate must have a proper foundation). Here, the Virginia Court of Appeals ruled that the agreement established that the parties would be liable for the debts incurred prior to the separation, there was no ambiguity in the language of the Agreement, the bankruptcy debt was marital debt and had been incurred prior to separation, and the Chesterfield County Circuit Court had erroneously allocated the bankruptcy debt entirely to the husband. Therefore, the Court of Appeals reversed the arrearage determination of the trial court and remanded the matter to the Circuit Court of Chesterfield County for final resolution.

You should consult with your Virginia divorce lawyer concerning the treatment of your bankruptcy debt in equitable distribution.

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