It happens all too often. One party in a divorce agrees to take on marital debt, but shortly after the divorce becomes final that same party files a Chapter 7 bankruptcy trying to discharge the debt and stick the innocent spouse with the bill. Understand that third party creditors are not parties to a divorce proceeding. This means that while the court can order one party to pay a joint debt, the creditor who is not a party to the divorce can still seek payment from both parties.
Prior to 2005, the Bankruptcy Code permitted the discharge of non-support related debts owed to a former spouse in certain circumstances. The 2012 case of Henderson v. Henderson, 389 S.W.3d 260 (Mo. E.D. 2012) applied the 2005 changes to the Bankruptcy Code to a Missouri divorce case.
In Henderson, the parties signed a marital separation agreement as part of their divorce judgment which ordered husband to pay back their joint line of credit debt. Husband also agreed to hold wife harmless from any liability on the line of credit debt and further to indemnify or repay her should she have to pay back the debt. Shortly after the divorce became final, and without notice or consent of wife, husband filed a Chapter 7 bankruptcy seeking to discharge his obligation to pay back the line of credit debt.
In 2005, 11 U.S.C. 523(a)(15) was changed to include the following, in pertinent part:
A discharge under section 727 ... of this title does not discharge an individual debtor from any debt —
(5) for a domestic support obligation;
(15) to a spouse, former spouse, or child of the debtor and not of the kind described 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 of record, or a determination made in accordance with State or territorial law by a governmental unit.
A domestic support obligation often refers to child or spousal support. Subparagraph (15) makes any debt assigned in a divorce nondischargeable in a Chapter 7 bankruptcy proceeding.
This issue can seem very complex. If you have an ex-spouse that was assigned debt in your divorce but is trying to discharge that debt in bankruptcy, reach out to the attorneys at Lake Munro to discuss your situation and help determine the next steps you should take. Contact us today for a consultation.