In re Crosswhite – Bankruptcy Discharge of Divorce Decree Debt
In re Crosswhite, 148 F.3d 879 (7th Cir. 1998).
NATURE OF THE CASE: This case involved a dispute over debts dischargeable in bankruptcy in the context of a property settlement agreement.
FACTS: The Crosswhite’s marriage was dissolved in August 1994 and H was ordered to pay child support. The terms of the property settlement agreement were incorporated into the divorce decree. H retained the marital residence and agreed to pay an $8,000 property equalization payment to W. H also agreed to hold W harmless on two joint debts of $3,489 and $1,700.
H was unable to meet his obligations under the agreement and filed for bankruptcy relief under Chapter 7. The creditors sued W and W restructured one of the loans and made monthly payments. W then filed an adversary proceeding to determine the dischargeability of H’s property settlement obligations. The court held that the obligations were dischargeable under 11 U.S.C. 523(a)(15)(B) and W appealed
ISSUE: How must the court determine whether a debt should be discharged under 11 U.S.C. 523(a)(15)(B), where the debt was incurred in connection with a separation agreement or divorce decree?
RULE OF LAW: In the discharge of a debt incurred in connection with a separation agreement or divorce decree, the court must place the burden on the debtor to prove that the debt should be discharged under 11 U.S.C. 523(a)(15)(B).
HOLDING AND DECISION: Debt obligations under a divorce decree are not dischargeable unless the debtor is either unable to pay the debt from disposable income or the benefit to the debtor in discharging the debt outweighs the detriment to the debtor’s former spouse or child. The lower court first considered H’s ability to pay the property settlement obligations under 523(a)(15)(A) and held that he was capable of paying the debts because he was a skilled mechanic who is reasonably able to earn more than he does at present. The court then placed upon H the burden of proof to show that he did not have the ability to pay the debts and concluded that he had not made that showing.
The lower court next considered whether the property settlement debts could be discharged under 523(a)(15)(B). The court noted that Congress gave no guidance on how to balance the debtor’s benefit against the creditor’s detriment. The lower court considered the totality of the circumstances and noted that W had remarried and she and her husband have full time jobs and have a combined income that is more than sufficient to cover their monthly obligations. The court then looked at H and determined that the obligations were dischargeable because the benefit to H of discharging the debt outweighed the detriment to W.
We rule that once the creditor’s initial proof has been given, the debt is excepted from discharge and the debtor is responsible for that debt unless he can prove either of the two exceptions, i.e. the ability to pay test (A) or the detriment test (B). Each is a separate test and the debtor bears the burden of proving either exception.
DISPOSITION: Vacated and remanded.