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Bankruptcy: Post- Divorce Loan Payoff - Nondischargeable Debt
Where the debtor's ex-husband paid off a loan to a joint creditor after the parties' divorce, the resulting debt to her ex-husband cannot be discharged in bankruptcy.
While married, Dunne incurred an education loan, co-signed by her husband, Lind. Dunne made some payments and then filed for divorce. The divorce judgment required her to pay the loan. She continued to do so but eventually filed a Chapter 7 petition.
The lender sought payment from Lind, who paid the loan then sued her in state court to enforce the divorce judgment. Dunne removed the case to the bankruptcy court and filed an adversary action to determine the dischargeability of the debt owed to Lind.
The bankruptcy court found for Lind. Dunne appealed.
Discussion
Whether the debt at issue is dischargeable is governed by 11 U.S.C. Sect. 523(a)(15). That section excepts from discharge a debt:
(i) to a former spouse
(ii) not of a kind described in Sect. 523(a)(5), and
(iii) incurred by the debtor in the course of a divorce or divorce decree.
The bankruptcy court found that Dunne implicitly incurred a nondischargeable obligation to Lind in the course of the parties' divorce proceedings, and that the resulting debt was excepted from discharge under Sect. 523(a)(15).
At issue is element (iii) under Sect. 523(a)(15). Dunne argues on appeal that under federal bankruptcy laws, the debt she owed to Lind was discharged because it was not 'incurred in the course of the divorce proceedings.'
The court disagrees, and, to the contrary, finds the reasoning of the Bankruptcy Court, which relied on Gibson v. Gibson (In Re Gibson), 219 B.R. 195 (B.A.P. 6th Cir. 1998), a sound approach to determining the dischargeability of the divorce debt.
That is, Dunne's acknowledgment and commitment to repay the BSL debt in the divorce proceeding was not simply an acknowledgment of a pre-existing debt to Sallie Mae, of no effect between the parties.
To the contrary, the divorce judgment resulted in a new, legally enforceable obligation to Lind to assume responsibility for the joint debt, and Dunne thus incurred a debt to Lind for repayment of the BSL loan that was nondischargeable, i.e., incurred by the debtor in the course of a divorce or divorce decree. The absence of an express hold-harmless provision does not alter this result.
In Gibson, the Sixth Circuit Bankruptcy Appellate Panel considered these same circumstances and concluded that the debtor-spouse's obligation to pay a note was 'incurred in connection with' a divorce and was excepted from discharge even though the debt was payable to a third party and the parties' agreement lacked 'hold harmless' or other indemnification language.
Conclusion
The bankruptcy court properly concluded that Dunne incurred an obligation in the divorce proceeding to hold Lind harmless for repayment of the parties' joint BSL debt, and therefore, Dunne's obligation for repayment to Lind is a debt that is excepted from discharge under Sect. 523(a)(15).
