Can a Virginia divorce court determine the dischargeability of debt in bankruptcy in a contempt proceeding?
Normally, the U.S. Bankruptcy Court is the appropriate forum for determining the dischargeability of debts. Although the U.S. Bankruptcy Court has the jurisdiction, or power, to determine whether a particular debt is dischargeable in a related process known as an adversary proceeding, it shares that jurisdiction for divorce-related debts with the Virginia Circuit Courts. The bankruptcy court only has exclusive jurisdiction or power to determine the dischargeability of debts based on false pretenses, fraud, use of a false financial statement, larceny, embezzlement, and willful and malicious injury to another person or the property of another person; a creditor must file a complaint within 60 days in the bankruptcy court to determine the dischargeability of these debts, or they are discharged.
The tension between the jurisdiction of the Virginia divorce courts and federal bankruptcy courts is illustrated by the case of In re Crawford, 183 B.R. 103 (Bankr. W.D. Va., 1995). In Crawford, husband and wife had entered into a post-nuptial agreement, more commonly known as a separation agreement or property settlement agreement, which was incorporated into a final decree of divorce in a Virginia Circuit Court. In the separation agreement, the husband agreed to hold wife harmless for her part of a joint debt to a credit union. The husband did not pay the debt and the credit union pursued wife for payment. The husband filed a chapter 7 bankruptcy case and received a discharge of his debts. The wife filed a motion in the Virginia divorce court to show cause why husband should not be held in contempt of court for violating the decree of divorce incorporating the post-nuptial agreement. The Virginia Circuit Court judge found the husband in violation of the divorce decree, sentenced him to an indefinite term in prison, suspended the sentence for 60 days, and allowed him to purge himself of contempt by complying with the separation agreement. The husband filed a motion in the bankruptcy court to stay the divorce court’s ruling and find wife in violation of the discharge injunction.
The bankruptcy court judge held that the dischargeability of a divorce-related debt is not finalized until the husband or wife litigates the issue in the Virginia Circuit Court or the U.S. Bankruptcy Court. Consequently, the judge found that the wife’s show cause motion could not be a violation of the discharge injunction. The husband could defend the wife’s motion in divorce court or seek removal of the proceeding to federal court within 30 days of his receipt of the initial pleading. In this case, the husband chose to defend the motion in the Virginia Circuit Court and the divorce court judge found that the hold harmless agreement by husband to wife was the real debt in issue. By defending the motion in the divorce court, the husband had allowed the state court judge to decide the dischargeability of the hold harmless agreement and he could not then re-litigate the issue in the bankruptcy court.
You should consult with your bankruptcy or divorce lawyer to determine whether you should remove a divorce contempt proceeding to federal court.