By Ryan C. Wood
For some reason 2019 is the year of one spouse filing for bankruptcy protection and the other spouse wanting nothing to do with bankruptcy even though all of their debt was incurred during the marriage. We have Section 524(a)(3) (Community Discharge) of the Bankruptcy Code to address this issue assuming the community continues and there is no divorce or death of the spouse that did file for bankruptcy and receive a discharge. Most bankruptcy attorneys will advise married couples to file jointly so both spouses receive a discharge and then it is black and white, not gray, if the community unfortunately ends by divorce or death. What about when spouses divorce and divvy up the debts in the divorce proceeding when the debt is not in the name or the social security number if the spouse that is supposed to pay? The Marital Settlement Agreement (MSA) says Spouse 1 must pay this amount of the community debt incurred during marriage that is in Spouse 2’s name and social security number.
Community Discharge
Section 524(a): a discharge in a case under this title –
(3) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect or recover from, or offset against, property of the debtor of the kind specified in section 541(a)(2) of this title that is acquired after the commencement of the case, on account of any allowable community claim, except a community claim that is excepted from discharge under section 523, 1228(a)(1), or 1328(a)(1), or that would be so excepted, determined in accordance with the provisions of sections 523(c) and 523(d) of this title, in a case concerning the debtor’s spouse commenced on the date of the filing of the petition in the case concerning the debtor, whether or not discharge of the debt based on such community claim is waived.
California Family Code Section 916
(a) Notwithstanding any other provision of this chapter, after division of community and quasi-community property pursuant to Division 7 (commencing with Section 2500 ):
(1) The separate property owned by a married person at the time of the division and the property received by the person in the division is liable for a debt incurred by the person before or during marriage and the person is personally liable for the debt, whether or not the debt was assigned for payment by the person’s spouse in the division.
(2) The separate property owned by a married person at the time of the division and the property received by the person in the division is not liable for a debt incurred by the person’s spouse before or during marriage, and the person is not personally liable for the debt, unless the debt was assigned for payment by the person in the division of the property. Nothing in this paragraph affects the liability of property for the satisfaction of a lien on the property.
(3) The separate property owned by a married person at the time of the division and the property received by the person in the division is liable for a debt incurred by the person’s spouse before or during marriage, and the person is personally liable for the debt, if the debt was assigned for payment by the person in the division of the property. If a money judgment for the debt is entered after the division, the property is not subject to enforcement of the judgment and the judgment may not be enforced against the married person, unless the person is made a party to the judgment for the purpose of this paragraph.
(b) If property of a married person is applied to the satisfaction of a money judgment pursuant to subdivision (a) for a debt incurred by the person that is assigned for payment by the person’s spouse, the person has a right of reimbursement from the person’s spouse to the extent of the property applied, with interest at the legal rate, and may recover reasonable attorney’s fees incurred in enforcing the right of reimbursement.
In a recent Ninth Circuit Bankruptcy Appellate Panel, U.S. Department of Education, Appellant, v. Carlos Carrion, Jr., Appellee BAP No. SC-18-1234-FBKu, May 31, 2019, discusses CFC 916. The original issue was the chapter 7 filing spouse, Carrion, argued that he should not be liable for the educational loans given he was a victim of fraud, identity theft and did not authorize the educational loans. While the lower bankruptcy court did not agree with Carrion regarding the fraud claims the lower bankruptcy court held Carrion was only responsible for half of the student loans due to the terms of his Marital Settlement Agreement (MSA).
The Ninth Circuit Bankruptcy Appellate Panel provided in plain language a spouse’s rights as to debts incurred in their name or the other spouse’s name upon divorce.
(1) Spouse A remains liable for Spouse A’s own debts, even if a Marital Settlement Agreement [MSA] requires Spouse B to pay some or all of those debts;
(2) Spouse A is not liable for any of Spouse B’s debts, except for any of Spouse B’s debts that the MSA requires Spouse A to pay;
(3) Spouse A is liable for any of Spouse B’s debts that the MSA requires Spouse A to pay;
(4) If Spouse A pays any debts that the MSA requires Spouse B to pay, Spouse B must reimburse Spouse A; and
(5) Vice versa.
In this particular case Carrion’s liability for his student loan was cut in half by the original bankruptcy court by interpreting CFC 916; more or less enforcing the MSA’s 50-50 split of the student loan debt. I will assume the student loan debt was all incurred during marriage so the community benefited from the student loans, thus why there is a 50-50 split in the MSA. The Ninth Cir. BAP reversed the lower bankruptcy court’s holding to clarify the issue. Carrion was the spouse that incurred the student loans in his name and his social security number. Then the spouses obtained a divorce and entered into a Marital Settlement Agreement (MSA). Their MSA provided the student loans were to be paid 50-50 by the divorcing spouses. Carrion as the spouse that incurred the student loans in his name/social is liable for the full amount of the student loans pursuant to CFC 916 regardless of what the MSA says.
What Happens If The Spouse Assigned The Debt Does Not Pay or Seeks a Bankruptcy Discharge?
This is an issue bankruptcy attorneys have to explain over and over again post-divorce. Here is the problem with an MSA and community debts incurred during marriage. Some debt is in one spouses name and social security number or the other spouse. The spouse with more debt in their name will normally want the other spouse to pay their fair share since the community benefited from incurring the debt. But just because the MSA says the other spouse has to pay the debt does not mean your personal liability goes away. If the spouse that is supposed to pay does not according to the MSA the remedy is for the spouse whose name and social security number the debt was originally incurred under pay the debt and then go back to state court and enforce the MSA. The paying divorced spouse must seek reimbursement from the spouse assigned the debt through the MSA. “The California Family Code recognizes that personal liability remains for community obligations assigned to the other spouse. The remedy is to pay the debt and seek reimbursement from the spouse assigned the debt.” (citing Cal. Fam. Code §§ 916(a)(1) and (b))…
If your MSA shifts the burdens of payment of debt upon divorce you have opened yourself up to this problem. If the original debt incurred in your name and social is not paid by your former spouse as agreed upon in the MSA you will still have a problem.
How To Fix This Problem When Getting a Divorce
I have for years advised people when seeking to obtain a divorce to not leave loose ends like this. First, if possible, why not file chapter 7 jointly before divorce to just discharge all community debt and move on with life? This would require family law attorneys to refer clients to bankruptcy attorneys though so ………. But what if you do not qualify to file chapter 7 plus nobody really wants to file for bankruptcy. A solution in the real world is for the each spouse to obtain a new loan to pay off any portion of debt they are responsible for that is in the other spouse’s name. For example if Spouse 1 has to pay $15,000 in debt that is in Spouse 2’s name then obtain a new loan (if possible) in Spouse 1’s name and social security number to pay the $15,000 in Spouse 2’s name so the scenario above is never any issue. Nonpayment of the new loan will not negatively affect the former spouse……… Then if the Spouse 1 has a problem making the loan payment Spouse 2 will never be adversely affected, no additional attorneys’ fees will be required to force Spouse 1 for reimbursement and Spouse 1 now has the option to file a chapter 7 bankruptcy post-divorce to discharge the debt………
Chapter 13 Bankruptcy Can Discharge Obligations to Ex-Spouses From Marital Settlement Agreements
Chapter 13 cannot eliminate support obligations, but can eliminate equalizing or agreed repayment of debts in one spouse’s name and social security number. So you just spent more than six months to get a divorce and haggle or agree on the split of assets and who is obligated to pay what debts. Spouse 1 had all the debt in their name and social security number so Spouse 2 must make monthly payments to Spouse 1 until the debt is paid off. The divorce decree is entered and then seven months later Spouse 2 files for chapter 13 bankruptcy. There is not too much Spouse 1 can do about it at this point. As long as Spouse 1 meets the requirements to confirm a chapter 13 plan of reorganization any unpaid obligation agreed to in the marital settlement agreement is discharged………. :
