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Loans Made by Woman to Former Husband Held Not Dischargeable in Chapter 7

Tuesday, February 12, 2013
Two loans made by a woman to her husband--one before and the other during their marriage--that he was ordered to repay in their divorce judgment were properly found to have been incurred in the course of his divorce and exempt from discharge in bankruptcy, the U.S. Court of Appeals for the Fifth Circuit held Feb. 6 (Kinkade v. Kinkade (In re Kinkade), 5th Cir., No. 12-30525, 2/6/13).

The funds for the loans--in the amounts of $23,675 and $20,000 to support the husband's separate business--came from the wife's separate property. They divorced in 2006, and their Louisiana divorce judgment provided that the husband owed the wife the loan debt of $43,675, and directed that his share of proceeds from the sale of community property ($4,961) be applied to it. The husband filed for Chapter 7 protection in 2011, and sought to discharge the debt. The wife successfully contested the discharge, with the bankruptcy court concluding that the husband incurred in debt in the course of the parties' divorce and that it thus was exempt from discharge under Bankruptcy Code Section 523(a)(15).

After the district court affirmed, the husband/debtor appealed to the Fifth Circuit, contending that Section 523(a)(15) applies only to community debts, not separate obligations.

Rejecting his argument, Judge Jennifer Walker Elrod pointed out that the “statutory text suggests no such distinction.” Observing that the husband/debtor cited no precedent on point, she emphasized that the “statutory language requires only that the debt be 'incurred by the debtor in the course of a divorce or separation'.” Likewise, Elrod was not persuaded by the husband/debtor's claim that Section 523(a)(15) did not apply to money the wife loaned him before their marriage because her right to reimbursement was contractual--not marital--and could not “suddenly gain additional status by being included in a petition for divorce and partition.” To hold otherwise, he contended, would be to recognize common-law marriage in contravention of Louisiana law.

Elrod explained that Section 523(a)(15) “leaves it to the state court to decide whether a property right is properly addressed in divorce proceedings, or as a separate contractual claim. Only after the state court has made that determination can Section 523(a)(15) have any effect.” Pointing out that the Louisiana divorce court determined that the debt, including the first loan, was more than a mere contractual obligation unrelated to the marriage, she said that applying Section 523(a)(15) “merely recognizes the state court's application of its own law; it does not, as [the husband] suggests, 'rewrite the community property law' of Louisiana.” Concluding that the entire debt was nondischargeable, she affirmed the judgment of the bankruptcy court.

James William Starr, Metairie, La., appeared for the husband. The wife was represented by David S. Moyer and Megan E. Matheny, Luling, La.

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