Property Settlement Agreements and Bankruptcy

December 28, 2020
petition to file for bankruptcy

According to a new Superior Court decision, Hanrahan v. Ketch, financial obligations arising from a property settlement agreement are automatically exempt from dischargeability in a bankruptcy and the State Court has concurrent jurisdiction to determine the dischargeability.[1]

For many years, the controlling case related to property settlement agreements and bankruptcy was Hogg v. Hogg.[2] The rule of Hogg was that when a debtor-spouse filed a bankruptcy, the non-debtor spouse was required to file an adversary proceeding in the Bankruptcy Court, which had jurisdiction to decide whether and to what extent a property settlement agreement would be deemed exempt from discharge.

The Bankruptcy Code at Section 523(a)(15) deemed debts incurred as a result of a property settlement agreement exempt unless (1) the debtor could not afford to pay; or (2) discharging the debt would result in a benefit to the debtor that outweigh the detrimental consequences to the non-debtor spouse.

Pursuant to Section 523(c)(1), the non-debtor spouse had a duty to act affirmatively by filing an adversary proceeding in the debtor-spouse’s bankruptcy matter, send notice and have a hearing for the Court to determine the dischargeability. The non-debtor had sixty (60) days from the first date set for the meeting of creditors to file the adversary proceeding. The purpose of the Hearing would be to examine the prongs of Section 523(a)(15) to make a determination of dischargeability.

In this new case, Hanrahan v. Ketch, the Superior Court looks to the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), which was entered after Hogg. In the BAPCPA, Section 523(a)(15) was amended to make this type of debt automatically exempted from discharge. In addition, Section 523(c)(1) removed property settlement agreements from the class of debts enumerated under this Section.

Since these provisions were changed to make property settlement agreements automatically exempt from discharge, Hogg no longer applies. It is no longer necessary for the non-debtor spouse to take any affirmative action to be exempted from discharge.

In addition, the Superior Court concluded that the State Court maintains concurrent jurisdiction and has the ability to hear issues of dischargeability of these debts. 28 USC Section 1334(B) provides state courts concurrent jurisdiction to construe the effect of a discharge and determine whether debt is within the discharge.

Navigating through bankruptcy and divorce issues requires legal sophistication. At Eckell Sparks we have over a century of combined experience in family law and are available to assist. Please feel free to reach out to us if you are in need of advice.

[1] Hanrahan v. Ketch, 2020 Pa. Super. Lexis 916.

[2] Hogg v. Hogg, 816 A.2d 314 (Pa. Super. 2003).

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