Drowning in Debt: Equitable Division and the Nondischargeability of Domestic Support Obligations in Bankruptcy

October 16, 2012
By The McKellar Law Firm, PLLC on October 16, 2012 12:54 PM |

In Yattoni-Prestwood v. Prestwood, No. E2011-01967-COA-R3-CV (Tenn. Ct. App. Aug. 29, 2012), Tennessee divorce attorneys learn the manner in which courts address equitable division for divorcing parties with no assets and lots of debt in light of the fact that domestic support obligations are not dischargeable in personal bankruptcy.

The facts of the case are as follows: Husband (earning $30,000 per year at the time of marriage) and Wife (earning $7,000 to $15,000 per year at the time marriage) were divorced less than one year after being married. A bank sued the parties on a promissory note on their real property, and the court combined the divorce and bank cases. Husband then filed for (and obtained) a Chapter 7 bankruptcy that discharged all of his debts. The bank proceeded against Wife for the deficiency following foreclosure on the parties' property, and she settled for a $15,000 entry of judgment (even though she was simply a co-signor and never owned the property).

At trial, the court discovered that Husband had placed the leftover loan money into his personal checking account and paid a portion to a previous girlfriend. When Husband promised that he was capable of repaying the loan and alleged that new loan requirements and his ownership of multiple properties made co-signature necessary, Wife had co-signed the note. Prior to marriage, Wife had enjoyed many assets from the settlement of a prior divorce (including two properties) and did not have much debt. Husband had multiple vehicles and a home, but he also owed mortgage payments on several rental properties.

During their brief marriage, Wife paid over $90,000 in expenses for Husband's vehicles, property, and the engagement ring he purchased for her. Wife also refinanced a property to obtain a $99,000 line of credit. Husband testified that he was primarily responsible for paying the bills. Husband said he had been reluctant to marry until achieving financial stability and pre-warned Wife that he was "borderline bankrupt" prior to marrying her; Wife denied this. The testimony conflicts as to whether Wife was indifferent to Husband's financial state and at any point asserted that she had enough assets. By trial, Wife was unemployed and $1,200 yearly real estate licensure fee was out of her budget; her sole income was from her two rental properties. Post-separation, Husband only earned $10,000-$12,000 per year appraising properties; he felt as though they had acquired the debt together and said he never promised to repay Wife any amount other than $4,000 for a credit card bill.

The court granted both parties a divorce and held them each responsible for their own liabilities. The case was then reopened on one issue: "whether Husband's discharge in bankruptcy 'trumped' the trial court's ability to assign him debt in the divorce." The court heard evidence from Wife's expert bankruptcy attorney regarding the nondischargeability of divorce-related debts and "domestic support obligations" but nevertheless affirmed its prior decision. The trial court also denied Wife's request for attorney's fees, in a departure from a prior ruling.

The appellate court addressed the issue of "whether the trial court erred in assigning one hundred percent of the marital debt to Wife." The court found that it would be "impossible" to restore either Husband or Wife to their pre-marriage financial state, as courts typically strive to do for short-term marriages. The court defined "marital debts" as "all debts incurred by either or both spouses during the course of the marriage up to the date of the final divorce hearing." The court asserted that courts can equitably divide marital debts by considering the Alford factors: (1) the debt's purpose; (2) which party incurred the debt; (3) which party benefitted from the debt; and (4) which party is best able to repay the debt.

The court found that the loan was not a marital debt since Husband applied for and obtained it prior to the marriage (rather than during the marriage); Husband placed the remainder of the loan in his personal Bank account and used the loan to pay off debt that was his alone. Since Wife settled for $15,000 with the bank after Husband discharged the loan in his Chapter 7 bankruptcy, the court ruled that Husband should pay Wife $15,000 of alimony in solido under Tenn. Code Ann. § 36-5-121.

On Appeal, the Appellate Court ruled that $89,000 of Wife's $99,000 line of credit that she obtained when she refinanced one of her properties was acquired during the marriage and thus constituted a marital debt . Therefore, a total of $108,700 - $89,000 of the equity line of credit plus $19,700 in credit card debt - was subject to equitable distribution between the parties, which the Court determined should be fifty-fifty.

Therefore, Husband was ordered to pay $54,350 in alimony in solido to the Wife, because he was found to have an ability to pay in light of the fact that Wife is solely liable to the creditors due to Husband's bankruptcy and his greater earning capacity.
The appellate court asserted that certain debts were not dischargeable in bankruptcy (per 11 U.S.C. § 523 (a)), including "domestic support obligations"--citing a case from Ohio, the court stated: "a requirement in a divorce decree to hold harmless or indemnify a spouse for joint obligations incurred during a marriage creates a 'new' [nondischargeable] debt, running solely between the former spouses." The court therefore modified the judgment and allocated the marital debt evenly between the parties, finding that "in the present case, equitable means equal"; the court held that alimony in solido from Husband to Wife to compensate for his share of the marital debt (in spite of Husband's debt discharge via bankruptcy) was proper. The appellate court also granted Wife her attorney's fees for both trial and appeal.