Divorce DebtIn In re Lawson, Ch. 13 Case No. 13-73476-WLH (click here for .pdf of opinion) the issue was whether a settlement agreement between the Debtor and his former spouse, whereby the Debtor retained (via quit claim deed) the marital home and agreed to make the loan payments, was a nondischargeable domestic support obligation pursuant to 11 U.S.C. §523(a)(5) and 11 U.S.C. §1328(a) or a dischargeable property division.  Like many in his situation, the Debtor tried to refinance and sell the house to pay off the loans but was unable to do so.  When he could not make the payments, he filed a Chapter 13 petition and his plan that provided for surrender of the house.  His former spouse (who then bore the burden of the mortgage debt but no longer had ownership) then filed an adversary proceeding for a declaration that the Debtor’s obligation to pay the mortgage was a non-dischargeable support obligation.  After a trial and a very fact-intensive analysis, Judge Hagenau ruled in favor of the Debtor and held that the debt was dischargeable.

I recommend reading the entire opinion, but will try to summarize here.  Judge Hagenau first reviewed the definition of a domestic support obligation in §101(14A), and noted that while it was an issue of federal law the Court could look to state law for guidance.  Among the factors that may be examined to ascertain the intent of the parties are:

1. the language of the divorce agreement;
2. the relative financial positions of the parties at the time of the agreement;
3. the amount of property division;
4. whether the obligation terminates on the death or remarriage of the beneficiary;
5. the number and frequency of payments;
6. whether the agreement includes a waiver of support rights;
7. whether the obligation can be modified or enforced in state court; and
8. whether the obligation is treated as support for tax purposes.

In re McCollum, 415 B.R. 625, 631 (Bankr. M.D. Ga. 2009).  She also looked to Georgia state law and state court decisions that distinguish between alimony or support and the division of property.

Numerous courts, both state and federal, have examined the issue of whether an obligation to make mortgage payments for an ex-spouse are in the nature of support, but because the facts vary so do the outcomes. Under Georgia law, “alimony” is defined as “an allowance out of one party’s estate, made for the support of the other party when living separately …”. O.C.G.A. § 19-6-1. “‘Periodic alimony’ is characterized by an indefinite number of payments, making the actual amount to be paid also indefinite.” White v. Howard, 295 Ga. 210, 211 (2014).  An award of permanent periodic alimony typically terminates “upon the death of either spouse or the remarriage of the recipient spouse unless otherwise expressly provided.” Id. A court in the course of a divorce may also divide the parties’ marital property either by equitable division or by property settlement. The Georgia Supreme Court has stated that “‘property settlement’ or ‘property division’ generally refers to the allocation of the marital estate between the divorcing spouses”. Id. at fn. 1. Each refers to the determination of “who owns property when its title is disputed and to the partitioning of jointly owned property.” Daniel v. Daniel, 277 Ga. 871 (2004) (cites omitted). “[E]quitable property division” represents the ‘allocation of assets acquired during the marriage to the parties, based on the respective equitable interests in those assets’.” Id. at 872 (cites omitted). However, the Georgia courts caution that a property settlement or equitable division of property may be used to provide the former spouse with maintenance or support. Id. at 873.

Applying the legal analysis above to the specific facts of this case, Judge Hagenau held that the agreement between the parties, made part of the divorce decree, was in the nature of a property settlement.  She found the following evidence important:

  • The agreement did not specify the parties’ intent as far as the obligation to pay the mortgage.
  • The agreement clearly stated that alimony was waived.
  • The agreement did not provide for the Debtor paying his former spouse any amount for her living expenses in lieu of paying the mortgage.  It only required the sale or refinancing, which indicated it was more of a property division.
  • The two children were splitting time between the parties’ homes.
  • The parties’ financial situation was relatively close, with child support making up some of the difference.
  • The agreement attempted to divide other property and debts.
  • There was no provision for termination of the payment obligation, such as upon death or remarriage, which would indicate it was in the nature of support or alimony.
  • Although the fact that the Debtor’s obligation to pay the first priority loan that was in the former spouse’s name only could be viewed as a support obligation, it was outweighed by the other evidence.

Thus, the Court held in favor of the Debtor and discharged the obligation to the former spouse.  Once again, we have the issue of one party in a divorce quit claiming their interest in the home to the other party, while remaining liable on the debt, but that does not seem to be going away.