If an unmarried couple splits up, the partner with assets could file bankruptcy to discharge what would have been a nondischargeable obligation had they been married, as demonstrated by the Seventh Circuit.
The February 23 opinion by Circuit Judge David F. Hamilton should be read by every family lawyer. For a property division to be enforceable between unmarried people, Judge Hamilton explains how and why an order or agreement to divide property should amount to a transfer of ownership, if it’s possible. (And it may not be possible in some circumstances.)
A couple had been married but divorced. Later, they reconciled and began living together again, but they did not remarry. The couple lived together another 15 years but broke up a second time. They agreed to arbitrate a division of assets accumulated while they were living together but unmarried.
The arbitrator awarded the woman $435,000, representing half of the 401(k) retirement account that the man had accumulated while they were living together unmarried. The award carried post-judgment interest. A state court confirmed the arbitration award and was upheld on appeal.
The man filed bankruptcy, seeking to discharge the award of $435,000. The woman argued that the award transferred ownership of specific property that would be unaffected by bankruptcy.
The bankruptcy court agreed with the woman, believing that the award gave her a property interest, but the district court reversed, holding that the obligation was dischargeable.
Bankruptcy’s Loopholes for Domestic Partners
The woman appealed. There were no disputed facts, so Judge Hamilton conducted de novo review to decide whether the award granted a vested interest in property that would not be dischargeable. He focused on the language of the arbitration award and Indiana law.
In greater detail, the arbitrator said he
hereby awarded [the woman] the sum of [$435,000], plus post‐judgment interest . . . . The arbitrator further finds that payment of this amount to the [woman] shall be accomplished by the [man] either through assignment of his pension and/or retirement benefits; or by Qualified Domestic Relations Order (QDRO), to be approved and effectuated and ordered by the Court; and/or by payment from [the man to the woman] in any other manner acceptable to both parties. Further, the Court hereby enters judgment in favor of [the woman] and against [the man and] finds that this judgment should not be dischargeable in bankruptcy, since it is specifically awarded to the plaintiff as compensation, and for her support and maintenance, whether in full or in part, throughout the cohabitation of the parties herein.
Judge Hamilton first observed that the initial phrases in the award used the language of a money judgment. Furthermore, Indiana law only permits post-judgment interest on money judgments. In addition, Indiana law provides protections for retirement accounts.
Next, Judge Hamilton focused on language not contained in the award. It did not declare that specified property was divided, nor did it specify a source of payment. Rather, the award gave the man three options, one of which was the payment of money.
The woman argued that the award was obviously intended to divide the 401(k) account because the amount of the award was exactly half. “But understanding how the arbitrator calculated the amount does not answer the question [of] whether the award was for a money judgment or a property interest,” Judge Hamilton said.
The arbitrator was between a rock and a hard place in terms of protecting the woman. Because they were not married, Indiana law would not have permitted a court to order a division of the retirement account. Whether an arbitrator could have ordered a division of property was “a difficult question,” Judge Hamilton said.
The type of award at issue was most akin to Section 523(a)(5), and the arbitrator did declare that the award would not be dischargeable in bankruptcy. Section 523(a)(5) indeed prohibits discharge of a support award, but only for a spouse, former spouse or child. Could the woman be considered a former spouse?
Section 523(a)(5) is one of the subsections in Section 523(a) where state courts have concurrent jurisdiction. Even if she was considered a former spouse, the wife could not win under Section 523(a)(5), Judge Hamilton said, because “the award [of] a nondischargeable support obligation for the purposes of Section 523(a)(5) was not actually litigated in the prior proceeding.”
Judge Hamilton affirmed the district court’s decision in favor of the man.
Your Question Answered
You are doubtless wondering why the debt was not excepted from discharge by Section 523(a)(15).
Easy answer: The man filed a chapter 13 petition, and debts covered by Section 523(a)(15) are not excepted from discharge in Section 1328(a).
Judge Hamilton’s decision does not say that the debtor was in chapter 13, but the record reveals that he was.
If an unmarried couple splits up, the partner with assets could file bankruptcy to discharge what would have been a nondischargeable obligation had they been married, as demonstrated by the Seventh Circuit.
The February 23 opinion by Circuit Judge David F. Hamilton should be read by every family lawyer. For a property division to be enforceable between unmarried people, Judge Hamilton explains how and why an order or agreement to divide property should amount to a transfer of ownership, if it’s possible. (And it may not be possible in some circumstances.)
A couple had been married but divorced. Later, they reconciled and began living together again, but they did not remarry. The couple lived together another 15 years but broke up a second time. They agreed to arbitrate a division of assets accumulated while they were living together but unmarried.
The arbitrator awarded the woman $435,000, representing half of the 401(k) retirement account that the man had accumulated while they were living together unmarried. The award carried post-judgment interest. A state court confirmed the arbitration award and was upheld on appeal.
The man filed bankruptcy, seeking to discharge the award of $435,000. The woman argued that the award transferred ownership of specific property that would be unaffected by bankruptcy.
The bankruptcy court agreed with the woman, believing that the award gave her a property interest, but the district court reversed, holding that the obligation was dischargeable.