Marital Debt and Bankruptcy: Court-Ordered Divorce Judgments and the "Hold Harmless" Clause
Marital Debt and Bankruptcy: May Not Be Dischargeable in Chapter 7 Bankruptcy
Marital debt and bankruptcy may be an uncomfortable fit. Support obligations and property settlements orderd by a judgment of divorce are not dischargeable in Chapter 7 bankruptcy under the Section 523(a)(5) and 533(a)(15) of the US Bankruptcy Code. This article, however, is aimed at another sort of debt which may not be dischargeable in Chapter 7 bankruptcy: so-called "marital debt." Marital debt is debt that is ordered either shared or allocated in full to one divorcing spouse or another by a Michigan state divorce court, is among the select types of debt given special treatment regarding is dischargeability by the US Bankruptcy Code, the Federal law that governs the bankruptcy process. To be clear, the divorce judgment does not (cannot) alter the contractual obligation of either party to the original lending creditor. The divorce judgment, instead, by way of a nearly standard divorce agreement clause called a "hold harmless" provision, creates a new obligation in the divorcing spouse who is taking on the burden of a debt that both spouses may be contractually liable to the creditor for to actually pay off the debt to the creditor so that the other spouse doesn't have to. The "hold harmless" provision in a court-ordered judgment of divorce will allow one divorcing spouse to sue the other spouse under a breach of contract theory if they fail to meet their obligations to repay that debt. That is, if they fail to "hold harmless" for the obligation to pay the debt owed to the creditor their former spouse. This will apply to any debt which one spouse is "holding the other harmless" for by way of this provision in a judgment for divorce, even if it is not an obligation constituting spousal, child, or other form of support or a property settlement agreement. Some bankruptcy courts have ruled, further, that a hold harmless provision is not specifically necessary in order for a debt that one spouse agrees to pay instead of the other via a court-ordered judgment for divorce to be considered non-dischargeable "marital debt."
Marital Debt and Bankruptcy: May Be Discharged in Chapter 13 Bankruptcy
However, the Section of the Bankruptcy Code limiting the dischargeability of "marital debt" in Chapter 7 bankruptcies, Section 523, applies only to Chapter 7 bankruptcies and not to Chapter 13 bankruptcies. Thus, a marital debt obligation arising from a "hold-harmless" clause or other obligation arising from a marital divorce decree or separation agreement that is not dischargeable in Chapter 7 may be discharged if the obliged spouse files Chapter 13 bankruptcy. The Section of the Bankruptcy Code enumerating the debts which are non-dischargeable in Chapter 13 (Section 1328(a)(2)) does not include obligations to former spouses that are not classifiable as support obligations. A Chapter 13 bankruptcy is a "payment plan" or "reorganization" bankruptcy. In a Chapter 13, you make monthly payments to the Bankruptcy Court, which assigns a Chapter 13 Trustee to receive the payments and deliver them to your creditors in certain percentages and in a certain priority order depending upon what type of debt it is: secured vs. unsecured, priority unsecured vs. non-priority unsecured. In a Chapter 13 bankruptcy, you only pay what you can (in theory) afford to pay after necessary household expenses are taken into consideration, and the balance of dischargeable debt that you do not pay through the Chapter 13 Plan is then totally discharged the way it would be in a Chapter 7. Court-ordered support payments, as noted, are never dischargeable in Chapter 7 or Chapter 13, and, in a Chapter 13, they will be paid in priority order ahead of the non-priority debts, such as credit cards and medical bills, etc. A martial debt obligation that is NOT "support" will be classified only as last-in-time-to-be-paid non-priority unsecured debt. Further, in a Chapter 13, "what you can afford to pay" will vary greatly depending upon: A) your income; B) your necessary household expenses: and C) your overall amount and types of debt. Although most Chapter 13 debtors pay much less than 100% of what they owe back to their creditors through a Chapter 13 bankruptcy payment plan, it is possible that you will be a so-called "100% Plan." If this is the case, over a period of 3-5 years, you will repay 100% of the debt in question—and there will be no liability lingering to fall upon the shoulders of your ex-spouse and, therefore, nothing for him or her to allege that you failed to hold him or her harmless from. Additionally, in a Chapter 13, co-debtors are protected from creditor harassment for the entire 3-5-year process right along with you. You will be protected from your creditors while in the Chapter 13, and so will your ex-spouse who is jointly liable on a consumer debt which you are obligated to pay by a judgment of divorce. However, it is possible, also, that the divorce judgment has created a lien on property held jointly which may require, regardless of dischargeability or non-dischargeability, that a martial debt be treated and paid as a higher priority "secured" debt obligation. A Chapter 13 plan involving such liens will need to be executed carefully in order to give you the full benefit of the bankruptcy process—and protect you from liability arising from a prior divorce judgment. For this reason, it will be very important to consult with an experienced Michigan bankruptcy attorney if you have debt that was treated one way or another in a prior judgment of divorce in order to determine what your best options for finding relief from the debt may be. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.