Bankruptcy's Fresh Start Versus Family Law's Marital Obligations-part Ii

• Publication year: 1999
• Pages: 55
• Citation: Vol. 28 No. 5 Pg. 55

28 Colo.Law. 55 Colorado Lawyer 1999.

1999, May, Pg. 55. Bankruptcy's Fresh Start Versus Family Law's Marital Obligations-Part II

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55

Vol. 28, No. 5, Pg. 55

The Colorado Lawyer
May 1999
Vol. 28, No. 5 [Page 55]

Specialty Law Columns
Family Law Newsletter
Bankruptcy's Fresh Start Versus Family Law's Marital Obligations - Part II
by Kathy A. Higby

Editors' Note

This is the second part of a two-part article. Part I, which was published in the April issue,1 discussed the bankruptcy court's framework and legislative policy to provide relief for a client whose ex-spouse attempts to discharge marital debts earlier ordered by a divorce court to be paid by that ex-spouse. The author introduced the concepts of debts "in the nature of support" and a balancing test, both designed to avoid dischargeability of marital debts. This Part II examines the applicable case law regarding both the U.S.C. § 523(a)(5) and § 523(a)(15) objections to discharge, and the effect of nondischargeability of debts

Applicable Case Law

U.S.C. § 523(a)(5) Objection to Discharge

A review of applicable federal law indicates that the exemption to discharge of debts "in the nature of support" has broad application. Debts may indeed be exempt that, at first glance, appear to be dischargeable. An understanding of applicable case law and a careful analysis are required to maintain the benefits obtained in the underlying dissolution action

A determination as to whether a debt is a nondischargeable support obligation or a dischargeable division of property is accomplished under the "factors and intent" test.2 The court must conduct a two-part inquiry to determine whether a payment is in the nature of support. First, the court must divine the spouses' shared intent as to the nature of the settlement agreement, even if it is unambiguous. The court is required to look beyond the words and labels of the agreement to resolve this issue. Second, if the court decides that the payment was intended as support, it must then determine that the substance of the payment was in the nature of support at the time of the divorce by determining whether the surrounding facts and circumstances, especially financial, lend support to such a finding.3 A party's obvious need for support at the time of the divorce is enough to raise the presumption that the obligation was intended as support, even when it is otherwise identified in the parties' agreement as property division.4

The intent of the parties can best be found by examining three principal indicators:

1) the language and substance of the agreement in the context of the surrounding circumstances, using extrinsic evidence if necessary;

2) the parties' financial circumstances at the time of the settlement, including whether a spouse had custody, was unemployed, or was employed in a less remunerative position than the other spouse; and

3) the function served by the obligation at the time of the divorce, recognizing that an obligation that serves to maintain daily necessities is indicative of debt "in the nature of support."5

A written agreement between the parties is persuasive evidence of intent. However, if the agreement is ambiguous or silent as to the parties' intent, the court must determine the parties' intention by looking to extrinsic evidence.6 When the agreement is ambiguous, evidence that payment of the debt is necessary in order for the ex-spouse to maintain daily necessities, such as food, housing, and transportation, indicates that the parties intended the debt to be in the nature of support.7

Although intent of the parties is important in classifying debts as dischargeable or nondischargeable, for bankruptcy purposes, it is not the dispositive factor.8 The distinction between divorce debt that is dischargeable and debt that is nondischargeable is not the clarity of the language of the settlement agreement, but rather, the function of the property in question.

The following pertinent factors should be considered in making a determination as to whether the obligation is support:

1) if the agreement fails to provide explicitly for spousal support, the court may presume that the property settlement is intended for support if it appears under the circumstances that the spouse needs support;

2) when there are minor children and an imbalance of income the...