Over the length of a marriage, couples accumulate both assets and liabilities. From positive earnings and purchases like investments and consumer goods, to debts like car loans and mortgages, you and your partner build both a personal and financial life together. In the event of a divorce, both assets and liabilities must be divided. This process is known as equitable distribution. In many cases, spouses, with the help of their attorneys, negotiate the division of these assets and liabilities, or the marital estate, which typically includes cash accounts, investment and retirement accounts, the value of real property, vehicles, and other personal items.
In equitable distribution, it is common for one spouse to pay the other spouse some amount of money to offset the parties’ shared investment in a piece of marital property. For example, one spouse may keep the couple’s house, but will pay the other spouse in cash or investments to account for the other spouse’s ownership stake in the house. The plan for how the parties will divide the marital property is written into a Property Settlement Agreement (“PSA”). A PSA is an enforceable contract that specifies each spouse’s obligations in the divorce.
Equitable distribution is complex enough on its own. But what happens when this process is complicated further by a spouse filing for bankruptcy? In November 2020, the Pennsylvania Superior Court reviewed the question of what happens when a spouse files for bankruptcy before paying a debt a spouse agreed to pay in a PSA? Through this case, the Superior Court significantly simplified the rule regarding marital debt and bankruptcy filings.
In the past, when one spouse filed for bankruptcy, the debt owed to the other spouse under the terms of a PSA may have been discharged under certain circumstances. In Hanrahan v. Ketch, a divorcing husband and wife signed a PSA providing for the division of their marital estate. Importantly, the PSA stated that, to account for husband’s interest in wife’s retirement plan, equity in the marital home, and other personal property, wife agreed to pay husband approximately $41,000 in installments. However, after making only about $15,000 in payments to husband, wife filed for bankruptcy and tried to discharge the remaining approximately $26,000 owed to her ex-husband.
Husband asked the court to enforce the PSA and reinstate ex-wife’s payments as they originally agreed. After considering various related legal issues and certain sections of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the court ultimately held that wife could not renege on the terms of the PSA and still owed her ex-husband $26,000 under the PSA. The court’s decision in Hanrahan, in conjunction with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, significantly expanded protections for non-debtor spouses from the threat that marital debts owed to them will be discharged if their ex-spouses file for bankruptcy.
Unraveling complicated, intertwined marital estates in a divorce can be confusing and frustrating. With precedent like Hanrahan, divorcing couples can rest a bit more assured that an ex-spouse filing for bankruptcy will not completely negate all the progress made during the equitable distribution process.
Brian is an attorney in MacElree Harvey’s Family Law Group and Banking and Finance Litigation Group. If you have further questions or want to schedule a consult with Brian, you can contact him directly at 610-840-0221 or [email protected].