Is a debt arising from an indemnification agreement with a former spouse dischargeable in bankruptcy? 

Is a debt arising from an indemnification agreement with a former spouse dischargeable in bankruptcy?

In some circumstances, such an obligation might be dischargeable. In bankruptcy, a debtor may discharge some debts owed to various types of creditors; however, some debts are specifically excluded from the discharge by the Bankruptcy Code. These include payments to former spouses that are considered to be domestic support obligations, as defined in 11 U.S.C. §101(14A), such as alimony, maintenance and support, under 11 U.S.C. §523(a)(5). In addition to these domestic support obligations, a chapter 7 debtor cannot discharge other debts owed to a spouse, former spouse, or child of the debtor which arise from a divorce decree or separation agreement under 11 U.S.C. §523(a)(15).  However, in a Chapter 13 bankruptcy case, these non-domestic support, family law obligations may be dischargeable.   A Chapter 13 debtor, who makes all payments required by the Chapter 13 plan, including any required domestic support obligations, may receive a discharge 11 U.S.C. §1328(a) (straight discharge, not a hardship discharge) of certain debts owed to former spouses which are not considered to be domestic support obligations.

Because of this exception in Chapter 13 cases, bankruptcy courts may be called on to determine whether a payment owed by a debtor to a former spouse is a domestic support obligation or some other type of debt arising out of a divorce, equitable distribution, a property settlement agreement, or a separation agreement. In Pagels v. Pagels (In re Pagels) Ch. 13 Case No. 10-71138-SCS, Adv. No. 10-07070-SCS (Bankr. E.D.Va. Feb. 9, 2011) the U.S. Bankruptcy Court for the Eastern District of Virginia had to determine whether an obligation, agreed to by the Debtor Defendant, to indemnify her former spouse, the Plaintiff, for payments made on a vehicle, was in the “nature of alimony, maintenance or support.”

At issue in this adversary proceeding in this chapter 13 bankruptcy case was a clause in a Marital Stipulation and Property Settlement Agreement, which contemplated the future ownership of the vehicles possessed by the Plaintiff and the Defendant. In the agreement, the Defendant was to take complete ownership and possession of a van, and indemnify the Plaintiff for any costs he incurred regarding the vehicle. In the end, however, the Defendant either loaned or gave the vehicle to the Plaintiff and ceased making payments. Under the agreement, the Defendant was obligated to indemnify the Plaintiff for these expenses. The Plaintiff claimed that the debt owed to him under this obligation was not dischargeable in the Defendant’s Chapter 13 bankruptcy case. The Defendant Debtor argued that it was not a domestic support obligation, and was thus, subject to the discharge provisions of §1328(a).

In Pagels, where the indemnification obligation arose from a “voluntarily executed marital settlement agreement”, the court had to determine whether the parties mutually intended to create a support obligation at the time of the divorce or separation.  In Pagels, the bankruptcy court applied a four-part test that had been applied previously by that court and by other courts in the Fourth Circuit to determine the intention of the parties.

First, the court examined the language and substance of the agreement itself.  In doing so, the court took various things into account, such as the context of the agreement, the form of the payments and the language of the labels used in the structure of the agreement. In a previous case, Brunson v. Austin (In re Austin), 271 B.R. 97 (Bankr. E.D. Va. 2001), the court noted that, while labels used to describe the obligation may be persuasive, a label is not the only factor a court is going to rely on to determine whether the obligation was in the nature of maintenance or support. See. In Pagels, the court found that the obligation to indemnify the former spouse for the van payments made by him was in the form of an “unconditional and permanent exchange of rights and duties . . . . without explicit regard to the support or maintenance of the parties or their children.” The court considered it to be a straight forward exchange of the property right to own and possess the vehicle, for the right to avoid payments or costs associated with the vehicle. Additionally, there was no language that suggested that the obligation to make payments on the vehicle loan, or indemnify the other party for such payments, would terminate upon the remarriage or death of the other party. Finally, the Plaintiff specifically waived any present or future payment of spousal support by the Defendant.

Second, the court examined the circumstances of the agreement to determine whether any overbearing influence existed which might put into question the intent of either of the parties involved.  In this case, the Defendant has made no allegations of overbearing, and, although the Defendant was unrepresented in the drafting of the agreement, she did successfully enforce the agreement in state court, an event which, according to the court, closed the door on questions of overreaching.

Third, the court examined the financial circumstances of the parties at the time of the agreement. In doing so, the court looked for whether the claimant showed an obvious need for support at the time the agreement was made. Further, the party with the weaker financial circumstances is considered less likely to have taken on a domestic support obligation. In this case, the Plaintiff earned more than the Defendant, specifically waived spousal and child support, and, in fact, had agreed to pay the Defendant $2,400 per month for five years.

Fourth, the court questioned the function of the obligation at the time of the agreement. Under this part of the test, a court will look to determine whether the function of the obligation was to provide some sort of daily necessity such as food or transportation. In some cases, an agreement to indemnify can be found to be an obligation of support, where the underlying obligation to make payments was determined to be an obligation for support. The court referred to In re: Johnson, 397 B.R. 298 (Bankr. M.D.N.C. 2008), where the debtor spouse had agreed to indemnify a former spouse for payments on a marital property which were necessary to allow the former spouse and a child to maintain their residency on the property.

Here, however, the court found that the agreement to indemnify was not an agreement to provide support, considering the fact that the agreement contemplated that the Defendant would be able make all of these payments herself. There was some question as to whether possession of the van was for the purpose of providing transportation for the children, considering the fact that the van was given to the Plaintiff when the Defendant asked the Plaintiff to take custody of their two children. The court found, however, that the benefit to the children of the use of the van was incidental, and that it was the intention of the parties that the Defendant would retain possession of the van. Regardless, the court noted in Pagels, events following the agreement “do not change the function of the obligation or the parties’ shared intention at the time of the [a]greement.”

Taking these observations into consideration, along with the fact that the Plaintiff himself said that he was not seeking spousal support, the court concluded that the obligation to indemnify the Plaintiff for payments made for the van was not a domestic support obligation pursuant to §101(14A) of the Bankruptcy Code, and was, therefore, dischargeable under §1328(a).

You should consult with your Virginia bankruptcy law lawyer and divorce lawyer, or Richmond bankruptcy law and divorce attorney James H. Wilson, Jr., regarding whether you may be able to discharge, or prevent the discharge by your spouse or former spouse of, a particular family law debt in bankruptcy.

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