No. 72 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. September 2012
Spouse’s Duty to Pay Opponent’s Attorney Fees May Be Held Non-Dischargeable in Bankruptcy
By Rebecca L. Reinhardt, Rreinhardt@lotsharp.com, 618-242-0246
Attorney’s fees ordered to be paid by one spouse on behalf of the other are non-dischargeable in Chapter 7 bankruptcy proceedings, a bankruptcy judge in Central Illinois held recently.
In Johnson v. Johnson, 2012 WL 2835462 (Bankr. C.D.Ill. 2012), the marital settlement agreement obligated the husband to pay the fees to the wife’s divorce attorney but the husband filed for bankruptcy before doing so. The wife’s attorney argued that the fees were in the nature of a domestic support obligation and thus non-dischargeable under 11 U.S.C. § 523(a)(5), and the bankruptcy court agreed.
The court said that after the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 (119 Stat. 186) (“BAPCPA”), the distinction between domestic support obligations and other types of obligations arising out of a marital relationship is of no practical consequence. In a Chapter 7 bankruptcy neither is dischargeable. The court also went on to state that it was of no consequence that the obligation was owed to the wife’s attorney and not to the wife directly. The language of § 523(a)(5) provides that the debt be “owed to or recoverable by” the spouse. Courts have not interpreted the statute literally, looking instead to the nature of the debt and not to whom the debt is owed. This case further clarifies which types of marital debt are non-dischargeable in certain types of bankruptcy proceedings.
A debt generally is presumed dischargeable in bankruptcy. This assumption may be overcome in cases of domestic support obligations, § 523(a)(5), and debts arising out of a divorce or separation, 11 U.S.C. § 523(a)(15). However, there is a significant distinction between the dischargeability of debts arising from a divorce or separation in a Chapter 7 and a Chapter 13 bankruptcy proceeding.
In Chapter 13, to obtain confirmation, plans must provide for payment in full of claims entitled to priority under § 507. 11 U.S.C. § 1322(a)(2). “Domestic support obligations” are entitled to such priority. 11 U.S.C. § 507(a)(1)(A). Further, “domestic support obligations” are excepted form the general discharge granted to debtors upon completion of Chapter 13 plan payments. 11 U.S.C. §§ 523(a)(15), 1328(a)(2). If the debtor’s obligation is “domestic support,” the debtor must propose to pay them in full through a repayment plan, and the obligation will not be discharged unless they are paid in full.
In Chapter 13, debts arising under § 523(a)(15) are dischargeable if the debtor receives a full-compliance discharge. In re McCreary, 2009 WL 5215587 (Bankr. C.D. Ill. 2009). Section 523(a)(15) excepts from discharge a debt “to a spouse, former spouse, or child of the debtor and not of the kind describe in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court or record, or determination made in accordance with State or territorial law by a governmental unit.”
Thus, if the obligation is not a support obligation but arises from a divorce or separation agreement or order, the debtor is only required to pay a required pro rata share of the funds available in the plan. The creditor spouse is treated as a general unsecured creditor and, upon successful completion of the plan, any remaining balance will be discharged. In re Rabideau, 2011 WL 165179 (Bankr. C.D. Ill. 2011).
Thus, the importance of the distinction between support and other obligations is significant in Chapter 13 cases. “Whether a debt is nondischargeable as being in the nature of alimony, maintenance or support is a matter of federal, not state, law.” In re Marriage of Lytle, 105 Ill.App.3d 1095 (1982). 11 U.S.C. § 101(14A) defines a domestic support obligation as a debt (1) owed to or recoverable by a spouse, former spouse or child; (2) that is in the nature of alimony, maintenance, or support; (3) that is established by a court order; and (4) that has not been assigned to a governmental entity. State law is used to ascertain the incidents or nature of the debt to determine whether it fits within the federal exception. Marriage of Lytle. The label attached to a decree and the language of the decree or underlying agreement between the parties are not controlling in determining dischargeability; rather, one must look to the substance of the decree or agreement to determine the essential nature of the obligation. Marriage of Lytle.
Courts have held that attorney’s fees owed to a former spouse, or the former spouse’s attorney, in conjunction with or awarded in the context of a support obligation have met the definition of “domestic support obligation” under the Code. See also In re Papi, 427 B.R. 457 (Bankr. N.D. Ill. 2010).
Whereas, in Chapter 13, debts under § 523(a)(15) are potentially dischargeable, in a Chapter 7 proceeding debts arising in the course of a divorce or separation are unqualifiedly nondischargeable. In re Harn, 2008 WL 130914 (Bankr. C.D. Ill. 2008). Section 523(a)(15), which excepts from discharge property settlement obligations incurred pursuant to a dissolution, was markedly changed by BAPCPA, and protects those debts which do not meet the test of “domestic support obligations” under § 523(a)(5). Previously, courts applied a balancing approach under § 523(a)(15) to determine whether the debtor could reasonably afford to pay such debts and the resulting harm posed to the creditor spouse in the event of a discharge.
An individual and his or her attorney involved in settlement of a dissolution action should clearly set forth the intent of the parties and insure that it meets the federal definition for the type of obligation the agreement is attempting to achieve. Furthermore, the parties should be made aware that particular obligations set forth in the agreement may ultimately be nondischargeable in a bankruptcy proceeding. Hold-harmless agreements have been held nondischargeable in Chapter 7 proceedings per § 523(a)(15), as have agreements to pay mortgage obligations. See In re Walden, 312 B.R. 187 (Bankr. C.D. Ill. 2004).
For debtors with significant marital debt, consideration must be given to the benefit afforded in a Chapter 13 case, when selecting under which chapter to file. In McCreary, the bankruptcy court held that a former husband’s filing of a Chapter 13 bankruptcy instead of a Chapter 7 to avoid the garnishment of bank accounts and paying the full amount due his former wife was legitimate.
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