|September 2007||Volume 3, Number 2|
|Table of Contents|
How Do I Discharge Thee? Let Me Count the Ways. Discharging the Non-Debtor Spouse
Often, in the context of a couple’s contemplated personal bankruptcy filing, clients inquire whether both are advised to seek bankruptcy relief. A desire to maintain one spouse’s access to credit, to protect the separate (non-exempt) property of the non-filing spouse, or perhaps the need to pay certain non-dischargeable claims in a Chapter 13, often motivate the inquiry. Alternatively, creditors may wish to continue to pursue claims against a non-filing spouse. In advising clients on this issue, practitioners must have a clear understanding of one of the most murky sections of the Bankruptcy Code – Section 524(a)(3).
A. The Discharge Generally
There are a number of limitations to the discharge granted in a Chapter 7 or 11 case. First, the discharge only impacts the personal liability of the debtor. Johnson v. Homestate Bank, 111 S. Ct. 2150, 2154 (1991); Dewsnup v. Timm, 112 S. Ct. 778 (1992). Second, the discharge does not cover any of the debts listed in 11 U.S.C. §§ 523(a)(1), (3), (5), (7), (8), (9), (10), (11), (12), (13), (14), (16), or (17), (18) or (19), nor debts listed in 11 U.S.C. §§ (2), (4), (6), or (15) if brought within 60 days of the first date set for the meeting of creditors. Third, at least in Chapter 7 asset cases, a discharge is limited to debts scheduled by the debtor. 11 U.S.C. § 523(a)(3). The Chapter 13 “super-discharge” expands the reach of its relief to include those debts described in 11 U.S.C. § 523(a)(1), (2), (3), (4), (6), (7), (10), (11), (12), (13), (14), (15), (16), (17), and (18). Finally, in all cases, and except as described below, a discharge generally does not affect debts of non-debtors owed to third-parties. 11 U.S.C. § 524(e).
B. The Community “Discharge” – Generally
Notwithstanding the limits of the relief afforded to non-debtors under 11 U.S.C. § 524(e), Section 524(a)(3) enjoins
The statute requires a great deal of parsing before its intent even begins to come clear. First, by its terms, the statute only protects property acquired after the commencement of the debtor’s case, and of the kind specified in 11 U.S.C. § 541(a)(2). Next, the statute only precludes recoveries by creditors on “community claims” -- defined in 11 U.S.C. § 101(7) as any “claim that arose before the commencement of the case concerning the debtor for which property of the kind specified in section 541(a)(2) . . . is liable.” 11 U.S.C. § 524(a)(3) thus prevents the prosecution of an action to collect on a community claim that arose before the filing of the debtor’s petition, against property acquired post-petition that fits the description of estate property contained in 11 U.S.C. § 541(a)(2). Were it not for the provisions of 11 U.S.C. § 524(a)(3), 11 U.S.C. § 524(e) would permit a creditor with a community claim to pursue the non-filing spouse and the spouse’s interest in after-acquired community property, if the spouse were personally liable for the debt under applicable state law. Even with the protections of 11 U.S.C. § 524(a)(3), creditors may continue actions against the spouse to recover from the spouse’s separate property, again so long as spouse is personally liable for the debt under applicable state law.
Despite the statute’s relative clarity thus far, 11 U.S.C. § 523(a)(3) contains a number of complexities and pitfalls. First of all, creditors placed on notice of an innocent spouse’s bankruptcy may see their community claims against the malfeasant spouse enjoined if the innocent spouse lists the creditor in his/her schedules. Second, a divorce contemporaneous with, or subsequent to, the bankruptcy will terminate the protections afforded by the injunction, since property acquired after a divorce would no longer be after-acquired community property protected by the 11 U.S.C. § 523(a)(3) injunction. Meri Von Burg v. Egstad (In re Von Burg), 16 B.R. 747 (Bankr. E.D. Cal. 1982); Gonzales v. Costanza (In re Costanza), 151 B.R. 588 (Bankr. D. N.M. 1993). Likewise, the death of the filing spouse would also seem to terminate the protection of the injunction afforded to a non-filing surviving spouse.
11 U.S.C. § 524(a)(3) contains certain exceptions which add to the complexity of the statute. Specifically, the injunction does not apply to
This provision requires a creditor to file an adversary proceeding within the time proscribed by Federal Rule of Bankruptcy Procedure 4007 to except the community claim from the scope of the injunction. However, even in the case of a timely-filed adversary proceeding, a court must undertake a two-step review of the community claims. First a court must decide if the community claim is excepted from discharge under 11 U.S.C. §§ 523, 1228 or 1328(a)(1), and if not, whether the debt would be excepted . . . in a hypothetical bankruptcy case concerning the non-filing spouse.
C. The Statute and Chapter 13
Although case law is sparse on 11 U.S.C. § 524(a)(3), one Court has noted that even the first prong of the analysis is not straightforward in the context of a Chapter 13 filing. Because the phrase "is excepted" refers to the particular case of the actual debtor, the "is excepted from discharge . . ." phrase is chapter-specific. However, in a Chapter 13 case, 11 U.S.C. § 523 does not apply to the discharge granted under 11 U.S.C. §1328(a); rather, debts in a Chapter 13 case are excepted from discharge only through 11 U.S.C. § 1328(a), which incorporates only a few limited debts described by 11 U.S.C. § 523. Thus, a literal reading of the statute suggests that because 11 U.S.C. § 523 does not apply to Chapter 13 cases, the injunction safeguarding the post-petition community property arguably encompasses a wider variety of debts than the actual Chapter 13 debtor's own discharge. In re Dyson, 277 B.R. 84 (Bankr. M.D. La. 2002). Notably, the Dyson Court was able to harmonize the statute in such a way as to avoid this result by concluding that “the most reasonable interpretation of the ‘is excepted from discharge . . .’ phrase is that it means that a community claim that is excepted from discharge under the applicable provisions of 11 U.S.C. §§ 523, 1228(a)(1), or 1328(a)(1), in the debtor's actual case, is also excepted from the general effect of 11 U.S.C. § 524(a)(3).”
D. The Actual Non-Dichargeability Proceeding Brought Against the Hypothetical Non-Filing Spouse.
11 U.S.C. § 524(a)(3) states that even if the debts are not excepted from discharge under §§ 523, 1228(a)(1), and 1328(a)(1) in the actual bankruptcy case of the filing-spouse, if the debt "would be so excepted . . . in a case concerning the debtor's spouse," the debt falls outside the injunction against collecting from post-petition community property. Thus, courts must determine whether the debt would be excepted from discharge in a hypothetical case involving the non-debtor spouse.
As the Dyson court noted, the statute does not specify which chapter of the Bankruptcy Code a court should apply in the event that the non-dischargeability complaint is filed timely:
The creditor in Dyson argued that the statute requires the hypothetical non-filing spouse’s case to be viewed as "chapter-less, a proverbial ‘kitchen-sink’ type bankruptcy case. Dyson, 277 B.R. at 102. The creditor argued that this result was necessitated by rules of statutory construction insofar as 11 U.S.C. § 524(a)(3) references 11 U.S.C. § 523(c) and 523(d), both of which would be made superfluous if the scope of the injunction were viewed through the lens of the debtor’s chapter 13 filing. Id. at 102-104. The Dyson Court further noted that inasmuch as 11 U.S.C. § 524(a)(3) also references only 11 U.S.C. § 1328(a)(1), rather than 11 U.S.C. § 1328(a) or 11 U.S.C. § 1328(a)(2), the statute also seems to imply that the hypothetical case of the non-filing spouse not vary irrespective of the chapter under which the debtor-spouse filed. Id.
Nevertheless, the Dyson Court remained unpersuaded that the chapter under which the debtor seeks relief has no bearing on the scope of the as 11 U.S.C. § 524(a)(3) injunction. The Court noted that the statute’s references to 11 U.S.C. §§ 1228(a)(1) and 1328(a)(1) do not apply to the hypothetical case of the non-filing spouse. Rather, these sections refer to debts classified as such by the debtor pursuant to 11 U.S.C. §§ 1222(b)(5), 1222(b)(9) or 1322(b)(5). Id. at 105. Accordingly, the Court concluded that 11 U.S.C. § 524(a)(3) requires that courts examine the scope of the discharge granted in the filing spouse’s bankruptcy; in a Chapter 13 filing, this requires that the court look to 11 U.S.C. § 1328(a)(2). If the debt is one of the types listed in to 11 U.S.C. § 1328(a)(2), then the community claim is likewise excepted from the injunctive provisions of 11 U.S.C. § 524(a)(3).
The Dyson opinion provides the only reported comprehensive analysis of the various interpretations of 11 U.S.C. § 524(a)(3). Its result affords non-filing spouses immense protection against community claims, especially in chapter 13 cases. Nevertheless, the dearth of case law (fewer than 75 cases even mention the statute, and fewer than 15 analyze it) and the ambiguities contained in the text provide fertile ground for disagreement about the scope of the relief afforded to spouses who choose not to seek bankruptcy relief themselves, but instead rely on the protections afforded by their husband’s or wife’s filing.
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