Are wife’s loans made before and during the marriage from her separate property to the husband for his business use dischargeable in bankruptcy?

Are wife’s loans made before and during the marriage from her separate property to the husband for his business use dischargeable in bankruptcy?

Not in the case of Kinkade v. Kinkade, 707 F.3d 546 (5th Cir. 2013), where the Fifth Circuit Court of Appeals affirmed the district and bankruptcy courts’ ruling that the loans were nondischargeable under 11 U.S.C. § 523(a)(15) .

In Kinkade, the wife made two substantial loans, one before the marriage and one during the marriage, from her separate property to her husband for his business.  The state divorce court judge entered judgment in her favor against her husband for the repayment of loans, along with an additional payment amount for her interest in community property to be sold.

Five years later, the husband filed chapter 7 bankruptcy case, in which he listed wife as a creditor.  The wife wisely filed an adversary proceeding in the husband’s chapter 7 bankruptcy case in order to have the debt declared to be nondischargeable.  (While the state courts and bankruptcy courts share concurrent jurisdiction over the dischargeability of family law debts, it is often best to have a decision made by the bankruptcy court judge during the course of the particular bankruptcy case.)  An adversary proceeding is a case ancillary to a bankruptcy case which can be used to determine issues related to claims, liens, property interests, and the dischargeability of debts, among other things.

Both husband and wife filed motions for summary judgment in the adversary proceeding.  The bankruptcy court judge granted wife’s motion for summary judgment, finding that the debt had been incurred during the course of the parties’ divorce, and was therefore nondischargeable under  11 U.S.C. § 523(a)(15) in a chapter 7 bankruptcy case.  The U.S. District Court affirmed the bankruptcy court’s decision on appeal.

The Fifth Circuit Court of Appeals first recognized the standard of review for an appeal based on summary judgment, that the court would consider the matter de novo to determine whether a fact issue exists that would have made summary judgment inappropriate, based on the facts and all reasonable inferences in the light most favorable to the non-moving party.  The appellate court framed the issue as whether the debt fit within the type of debt nondischargeable under  11 U.S.C. § 523(a)(15) in a chapter 7 bankruptcy case.  While Domestic Support Obligations, as defined in 11 U.S.C. §101(14A) , are nondischargeable in all bankruptcy cases, the non-DSO divorce-related debts under 11 U.S.C. § 523(a)(15) are dischargeable in a chapter 13 case, but not in a chapter 7 case.  As the debt arose out of a state court divorce case, the bankruptcy court judge found it to be a nondischargeable debt under 11 U.S.C. § 523(a)(15) .

The husband argued that the debt did not fit within because it was a separate debt, not a community debt and that a portion of the debt, the amount lent prior to the marriage, was a contractual obligation, not a marital obligation.  The appellate court affirmed the bankruptcy court’s reasoning on the first argument that there was no distinction in the statutory language supporting the husband’s argument that separate debts were not included under 11 U.S.C. § 523(a)(15).  The Circuit Court of Appeals also rejected the second argument, by respecting the state court’s application of its own law in deciding to include the substantial premarital debt in the final decree of divorce.

It is important to note that this type of debt might have been discharged in a chapter 13 case under 11 U.S.C. §1328.

You should consult with your bankruptcy and divorce attorney or Richmond bankruptcy and divorce lawyer James H. Wilson, Jr., to discuss whether a particular debt related to a marriage or divorce might be discharged in a Virginia bankruptcy case.

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