Bankruptcy: Marital Obligation Discharged in Bankruptcy

     The United States Bankruptcy Court in Richmond, in the case of Nelson v. Nelson, ruled that a wife’s obligation to husband was discharged. The Court found that although a Virginia Circuit Court held that the wife had to pay a husband $5,6535 for a car debt under a “hold harmless” clause in their divorce agreement, the Bankruptcy Court ruled that the State Circuit Court order was void. 

     The parties’ separation agreement, incorporated into their final divorce decree, provided that an auto was the wife’s exclusive property, that she would be responsible for debt, taxes, insurance and licensing fees on the vehicle, and that she would “indemnify and hold the Husband harmless for the same.” The wife, who received a Chapter 7 discharge in bankruptcy, contends the obligation was discharged. The husband brought a show cause proceeding in a Virginia Circuit Court seeking an order that wife remained liable for the debt secured by the auto and that she was in contempt for violating the separation agreement. The State Circuit Court entered an order stating that the wife was liable to the husband for the debt secured by the auto, or $5,635 with interest. Although the State Circuit Court found that the debtor still had an obligation to indemnify the husband, it lacked the jurisdiction to determine whether this debt had been discharged because the Bankruptcy Court has exclusive jurisdiction in discharging a pre-petition debt included in Bankruptcy Code §523 (c). In any event, the Circuit Court order was silent as to its findings on the dischargeability of the debt. The parties therefore could not argue that the Circuit Court order prevented the relitigation of the dischargeability issue based on the principle of collateral estoppel; nor could the parties argue that this matter was barred by res judicata.

     The Bankruptcy Court ruled that the debtor’s obligation to discharge the husband for the indebtedness secured by the auto was discharged by operation of Bankruptcy Code §523 (c)(1). Accordingly, Bankruptcy Code § 524(a)(1) voided the judgment the husband obtained in State Circuit Court and the discharge injunction in Bankruptcy Code §524(a)(2) further enjoined the husband from taking any action to collect this debt as a personal liability of the debtor.