Will the ex-husband’s chapter 13 plan paying less than a quarter of a lump sum equitable distribution award to ex-wife from a divorce case pass the good faith test for confirmation in Virginia?
Not in the case of In re: Edward Trae Green III, Case Number 09-17646-SSM, from the U.S. Bankruptcy Court for the Eastern District of Virginia, illustrates. While it is possible to discharge a divorce-related debt, other than a Domestic Support Obligation as defined in 11 U.S.C. 101(14A), in chapter 13 under 11 U.S.C. § 1328, still the chapter 13 case must be filed in good faith and the chapter 13 plan must be proposed in good faith in order for the plan to be confirmed.
In the In re: Edward Green case, the Debtor and his wife had a contested divorce case in Virginia, with the divorce court judge dividing the marital property in equitable distribution, in accordance with Virginia Code Section 20-107.3, 60% to the Debtor husband and 40% to the Debtor’s wife. The primary marital asset was the marital residence, which the Virginia Circuit Court judge found to have a value of $370,000 at the time of the equitable distribution hearing in the divorce case. After subtracting a first deed of trust in the amount of $178,851 and a $75,041, the marital residence had equity of approximately $116, 108. Husband was awarded the marital residence and had to pay wife a lump sum equitable distribution award of more than $45,737 within a year. The husband did not pay the lump sum equitable distribution award and the wife filed a show cause summons to have the husband held in contempt of court by the Virginia divorce court judge. The husband filed chapter 13 bankruptcy three days before the show cause hearing in the Virginia Circuit Court.
At the time of the chapter 13 bankruptcy, the Debtor claimed the fair market value of the marital residence had decreased to $335,000, the balance on the first mortgage had decreased to $170,000, and the balance on the home equity line of credit had increased to $139,000, such that after subtracting the costs of sale, there was no net equity which could not be protected under the Debtor’s Virginia Homestead Exemption. The Debtor filed a chapter 13 plan which proposed only a 21% payout to unsecured creditors, including the wife’s equitable distribution lump sum award. Interestingly, the Debtor’s ex-wife did not claim that the equitable distribution award created a secured debt against the home. Instead, the ex-wife filed an objection to confirmation of the chapter 13 plan on the grounds of lack of good faith in the filing of the case and the proposing of the plan.
The U.S. Bankruptcy Court judge for the Eastern District Court of Virginia agreed with the ex-wife and denied confirmation of the plan. The court noted that good faith was determined by a number of factors under the 4th Circuit Court case of Deans v. O’Donnell. In this particular case, the bankruptcy court judge recognized that the Debtor was attempting to discharge a debt that would not be dischargeable in a chapter 7 case, the lump sum equitable distribution award that would be nondischargeable under 11 U.S.C. 523(a)(15) in a chapter 7 case. While that was not dispositive, it was a factor that could be considered. What was most troubling in the good faith analysis, was the Debtor’s unexplained increase in the balance of the home equity line of credit, in an amount sufficient to pay off the ex-wife’s lump sum equitable distribution award in full. Consequently, the judge denied confirmation.
A different outcome might have been obtained had the Debtor been able to explain satisfactorily why the balance on the home equity line of credit increased from approximately $75,000 at the time of the equitable distribution hearing to $139,000 at the time of the filing of the chapter 13 case. In addition, had the wife claimed her equitable distribution award was a judgment lien against the former marital residence supported by some equity such that it could not be stripped down, then the Debtor would have had to pay the secured debt in full.
You should discuss with your Virginia bankruptcy and divorce lawyer or Richmond bankruptcy and divorce lawyer James H. Wilson, Jr., whether a particular divorce related debt may be discharged in bankruptcy.