His Bankruptcy Will Not Discharge His Debt to Her

Wife [W] and Husband [H] were married in June of 1995.

Prior to their wedding in May of 1996, W’s parents created a company [Company] with the parents as general partners. Although the parents have “full, exclusive, and complete authority and discretion in the management and control of the business of the [partnership”, W, her three siblings and her parents were limited partners; each having 20 percent of Company. None of the limited partners were responsible for debts, liabilities, contracts or any other liabilities of Company. Each partner also has a capital account in the partnership. W had 20 percent of Company’s total capital.

In 2005, Company made three loans to H totaling $150,000.00. The loans were credited to W’s account, and her capital account was reduced by the same amount of the loans. In 2009, H executed another loan for the $150,000.00, but this time with eight percent interest. He never repaid the loan.

In 2011, W and H divorced. Their divorce decree stated that all rights, title, and interest to any community interest that may exist in Company [to W] … and assigned to H, as his separate obligation, his debt to Company. The decree also required H to indemnify and hold W harmless from that debt. Later that year, H filed for Chapter 7 bankruptcy – and included his loan from Company as part of his debts. All of his debts were then discharged.

In 2015, W attempted to re-open H’s bankruptcy proceedings and have H’s discharge of his Company debt non-dischargeable. She was unsuccessful. The bankruptcy court declined to re-open the proceedings, so she went back to the family court that handled their divorce. The trial court found for W and decided that H owed her the money (now almost $350,000.00 including interest), because Company had reduced her share of the capital account.

H appealed and the Appellate Court agreed with the trial court.

Although Chapter 7 bankruptcy removes all of a party’s debts, there are exceptions. Those exceptions include anything that would be used to deprive a dependent spouse (or ex-spouse) and children of the support and maintenance due them. In other words, bankruptcy cannot be used to avoid paying legitimate marital and child support obligations. This also includes those obligations made by divorce decree.

“We accordingly hold that a debt is non-dischargeable pursuant to section 523(a)(15) [of Title 11 of the United States Code] if the nature of the debt is such that its discharge would directly and adversely impact the finances of the debtor’s spouse or former spouse. The identity of the payee is not determinative…”

“…Here, the trial court correctly determined that [H]’s debt to [Company] is a debt to a former spouse. [H]’s loan came from [W]’s share of [Company]. The debt was credited against her partnership interest, and her capital account was reduced accordingly. [H]’s failure to repay the debt adversely affects [W]’s finances. The debt is therefore “to a former spouse…”

Categories: