Ex-wife’s loans before and during marriage held non-dischargeable

In the case of In re Kincade, the U.S. Fifth Circuit Court of Appeals upheld rulings by the bankruptcy court and the district court that loans made by the debtor's ex-wife, from her separate property, which were made to the debtor both before and during the parties' marriage, were nondischargeable in the debtor's Chapter 7 bankruptcy proceedings.

Background of the case

The first loan, made before the parties were married, was for $23,675.50. The second, made during the marriage, was for $20,000. Both loans were given for the support of the debtor's separate business. The parties divorced in 2006. A Louisiana state court judgment in the divorce proceedings determined that the debtor was indebted to his ex-wife for the both business loans.

Procedural history

In 2011 the debtor filed a Chapter 7 bankruptcy petition. The ex-wife filed an adversary complaint, requesting a court ruling declaring the loan debt to be non-dischargeable.

Section 523(a)(15) of the Bankruptcy Code provides a discharge exception for divorce-related debts to a spouse, former spouse, or child of the debtor, which are not in the nature of support, if the debt is incurred by the debtor in the course of a divorce.

The bankruptcy court ruled that the business loan indebtedness had been incurred during the course of the divorce, and was therefore nondischargeable under the statute. The district court affirmed the bankruptcy court's ruling.

The Fifth Circuit's ruling

The debtor appealed to the Fifth Circuit, challenging whether § 523(a)(15) applied to the debt. His argument was based on two separate grounds.

First, the debtor contended that § 523(a)(15) applies only to debts held jointly by the community, not to those debts held separately. The Fifth Circuit rejected this argument, finding that the text of the statute did not make any distinction between a community debt or a separate debt, but simply required that the debt be "incurred by the debtor in the course of a divorce or separation."

The debtor's second argument contended that the first loan, which pre-dated the parties' marriage, did not fall under the discharge exception of § 523(a)(15). The debtor contended that the legal basis for the ex-wife to recover on the first loan arose solely under contract law, and not under marriage law. The debtor argued that the first loan could not "suddenly gain additional status by being included in a petition for divorce and partition," as this would in effect rewrite state community property laws by giving improper recognition of common-law marriage in contravention of Louisiana law. The Fifth Circuit rejected this argument as well. In the present case, the debtor and his ex-wife did marry, said the Fifth Circuit, and state courts are free to decide whether property rights may be addressed in divorce proceedings or as separate contractual claims. Since the state court resolved the parties' obligations to one another, and thus determined that the first loan was more than a separate contract obligation unrelated to the marriage, the debt was held to be nondischargeable under § 523(a)(15).

Individuals facing debt problems or bankruptcy should seek the advice of competent legal counsel experienced in such matters to assist them in the protection of their legal rights.