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In re Sanabria

275 B.R. 204 (D. N.J. 2002)

BANKRUPTCY; DIVORCE— The obligation to make payments under a divorce property settlement agreement may be discharged in bankruptcy if the debtor does not have the resources to pay or the benefit to the debtor of discharging the debt is greater than the detriment to the payee.

A couple divorced after 19 years of marriage. During their marriage, they operated several businesses together and owned several investment properties. The divorce ended the business relationship and the parties entered into a property settlement agreement. The agreement provided for child support, alimony, and payment from the husband to the wife in exchange for all of the wife’s right, title, and interest in the jointly owned properties. That payment was to be made in five small yearly installments and a final lump sum payment in the fifth year. The husband failed to comply with the terms of the property settlement agreement and filed for bankruptcy under Chapter 11, later converted to a Chapter 7 bankruptcy. In the bankruptcy proceeding, the wife argued that her ex-husband was earning much more than the amount to which he testified. Nonetheless, it was conceded that each of the businesses and the properties retained by the husband were either in foreclosure or had been turned over to a receiver. Only the insurance business and a catering hall were still operating. The catering hall was operating at a loss but the insurance business was generating income to the ex-husband. With that as background, the wife requested that her claim to the unpaid property settlement agreement be non-dischargeable. One provision of the Bankruptcy Code makes debts classified as support, alimony or maintenance non-dischargeable. That section specifically distinguishes such obligations from property settlement agreements. “Whether or not an obligation takes the form of support or alimony, for purposes of the Bankruptcy Code, is a matter of federal law.” In the Third Circuit, “whether an obligation falls within the category of support or alimony, as opposed to a property settlement, depends on the intent of the parties at the time of the settlement agreement.” There was no question that the amount claimed by the wife was as a property settlement arrangement and not as alimony or child support. Section 523(a)(15) of the Code was adopted by Congress “to prevent debtors from discharging marital debts, other than alimony, maintenance or support that are incurred in connection with divorce or separation… .” Case law interprets this section as being “intended to encompass divorce related debts, such as those in property settlement agreements that ‘should not justifiably be discharged.’” Nonetheless, the amount owed under a property settlement agreement (other than alimony or child support) can be discharged under Section 523(a)(15), where a debtor shows that he or she “cannot pay the obligation or that discharge of the debt would yield an inequitable result.” Consequently, the exceptions to the non-discharge rule for sums owed pursuant to property settlement agreements, include where “the debtor does not have the ability to pay such debt; or ... discharging the debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse or a child of the debtor.” Here, the evidence was clear that the husband did not have the ability to pay the property settlement sum. His annual income was approximately equal to his obligations for alimony and child support. In addition, he had three young children to provide for. Testimony was received that the husband had to borrow money to pay his support obligations. Consequently, the Court found it clear that discharging the property settlement debt would provide a benefit to the debtor. Further, the wife testified that if she received the full support obligations, that amount, combined with her own income, would be sufficient to support her. In sum, “[t]aking into account the debtor’s income and obligations, [the debtor] successfully proved that the detriment test weigh[ed] in his favor. Moreover, the benefits to [the debtor] in discharging the debt at issue [were] greater than any harm caused to [his wife].” Therefore, the amount owed pursuant to the property settlement agreement was dischargeable in the Chapter 7 petition.

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