Is a husband’s agreement to pay his wife half the monthly payment amount for her parent’s loan to them during the marriage nondischargeable in husband’s chapter 7 bankruptcy after a divorce?

Is a husband’s agreement to pay his wife half the monthly payment amount for her parent’s loan to them during the marriage nondischargeable in husband’s chapter 7 bankruptcy after a divorce?

Yes, the court ruled in Shaver v. Shaver, Adversary Proceeding Number 14-5005, from the U.S. Bankruptcy Court for the Western District of Virginia, Harrisonburg Division.

In Shaver, the wife’s parents lent $30,000 to the couple during the marriage.  The wife’s parents drew the money from a home equity line of credit on their home.  There were no written documents evidencing the loan between the parents and their daughter and son-in-law.  The husband and wife orally agreed to repay the wife’s parents with monthly payments of $280 directly to the parents’ lender until the loan was paid in full.

The husband and wife subsequently entered into two written separation agreements, both prepared by the husband, when they decided to divorce.  In the first agreement, the husband agreed to pay half the monthly loan payment directly to the wife.  The next day, the parties signed a second agreement in which they divided up responsibility for paying the marital debts, without specifically mentioning the debt to the wife’s parents.  The husband and wife were later divorced.

The husband remarried and subsequently filed a joint chapter 7 bankruptcy case with his new wife, listing his now ex-wife as one of his creditors.  The ex-wife filed an adversary proceeding, a separate case associated with a bankruptcy case, to determine the dischargeability of the debt evidenced by the first agreement.  The ex-wife claimed the debt was nondischargeable in a chapter 7 case under 11 U.S.C. §523(a)(15), which makes nonsupport debts owed to a spouse or former spouse, incident to a divorce or separation , nondischargeable.  [The ex-wife did not claim the debt was as a “domestic support obligation” under 11 U.S.C. §101(14A), as being in the nature of support or maintenance, which would have made the debt nondischargeable under 11 U.S.C. §523(a)(5) in any kind of bankruptcy, not just chapter 7.]

The main issue in Shaver is whether the debt is owed to a spouse or former spouse, such that it is nondischargeable.  The husband claimed the debt was owed to the ex-wife’s parents, not to the ex-wife, and the first agreement merely altered the payment terms, but did not create a new debt to the ex-wife.

The court first determined that the first and second agreements were to be read together as a single document, citing the Fourth Circuit Court of Appeals case of Lansdowne on the Potomac Homeowners Ass’n, Inc. v. OpenBand at Lansdowne, LLC, 713 F.3d 187, 205 (4th Cir. 2013).  The court then held that the new obligation to pay $140 directly to the wife was a new debt, part of the parties’ overall division of marital debts evidenced by the first and second agreements, creating the ex-wife’s right to receive a payment directly from the husband.  As the new debt was owed to a former spouse, the debt met all the elements of 11 U.S.C. §523(a)(15) and was nondischargeable in the husband’s chapter 7 bankruptcy case.  Further, the bankruptcy court ordered the husband to pay the ex-wife’s attorneys fees and costs as allowed by the second agreement.

The husband could have avoided the outcome in Shaver by not preparing the first agreement, or by specifying the effect of the second agreement upon the first, or by filing a chapter 13 bankruptcy case instead of a chapter 7 bankruptcy case.  Divorce counsel would typically address the effect that a comprehensive separation agreement would have on any prior agreements between the parties, typically by providing that the later, comprehensive agreement supersedes those agreements and renders them void and a nullity, if that is what the parties had intended.  While it is not rare for spouses to sign their own brief written agreement before consulting counsel for a comprehensive separation agreement, it is unusual for divorcing spouses to have more than one controlling separation agreement.

While a debt under 11 U.S.C. §523(a)(15) is nondischargeable in a chapter 7 case, it would be dischargeable in a chapter 13 case under 11 U.S.C. §1328(a) .  Perhaps the husband and the new wife should have filed a joint chapter 13 case to discharge the debt to the ex-wife, or the new wife could have filed a chapter 7 case, and the husband could have filed a chapter 13 case on his own at a different time.

You should consult with your Virginia bankruptcy and divorce attorney or Richmond Divorce Lawyer James H. Wilson, Jr., to discuss how to best address debts owed to or from former spouses in bankruptcy.

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