Case Review: The Impact of Divorce Judgments on Real Property in Bankruptcy | law office of richard kistnen

I saw this fairly common fact pattern once while I was sitting in state court waiting for my case to be called.  I was watching a conference on a post-judgment divorce case.  The wife had filed papers against her former husband alleging that he was breaching the terms of the settlement agreement because he was not cooperating with her with respect to a loan modification application.  The husband’s response was pretty clear: he signed the deed to the house over to her, as per the divorce, and then he filed for bankruptcy.  Plain and simple, his ties to the house, other than still being a name on the mortgage, were done.  The parties involved in that conference, including the court attorney, were a little unsure how the bankruptcy affected the house and loan and what the wife was trying to do.  The confusion is a result of having to navigate several different areas of law at once.

This case comes out of the Bankruptcy Court for the District of Nebraska.  The debtor and her husband had purchased a home back in December of 2001 secured by a mortgage.  In 2004, the couple divorced.  As per their divorce decree, the debtor-wife “awarded the subject real estate and the debt owed on it to the debtor’s former husband.”

The debtor-wife then filed for chapter 7 bankruptcy in 2006.  Believing that she was no longer owner of the house or responsible for the mortgage, as per her understanding of the divorce decree, she did not list or include the mortgage lender in her bankruptcy papers.  The bank knew nothing about her filing, the debtor received her discharge in November of 2006, and the bankruptcy case was closed.  The debtor-wife then filed a chapter 13 bankruptcy case in 2012 (which was eventually dismissed for failure to make plan payments) where she, again, did not list the mortgage bank as a creditor of any kind.

In 2014, the debtor-wife received notice from the mortgage bank that there was a default in the mortgage payments, and it was accelerating the entire amount due.  The mortgage bank, at this point, seized the debtor’s income tax refund of about $5,500.00.  She subsequently filed a new chapter 13 case in March 2015, listing the U. S. Government as owing her money (for the tax refund offset).  The mortgage lender filed a proof of claim in this case.

In her chapter 13 plan, the debtor did not schedule any payments to be made to this bank.  She included a provision that any interest she may have in the real estate in question would be surrendered to them, although she was under the firm belief that the house and mortgage all went over to her ex-spouse, as per the divorce decree.

Unfortunately , for the debtor, the divorce decree, as in most places, is between the spouses.  It does not affect the rights of a third party.  She may have surrendered her interest in the house to her ex in the divorce, but nothing else was done.  A deed transferring her interest in the house to him was never filed.  Additionally, the note and mortgage are not affected by a divorce.  As such, she still owned (at least part of) the house, and remained liable on the mortgage after the divorce.

The interesting question in this case is how her bankruptcy affected her liability on the mortgage.  She received a discharge – except that a discharge only discharges debts that were contained within the bankruptcy.  (In most cases, in a “no-asset” case, a creditor will not reopen a case to add their debt since it might cost more to do so than the debt itself, in the face of someone who’s filed for bankruptcy.)  Thus, this court left it open and up to the bank to file a separate proceeding to determine whether the discharge in her case would also apply to that debt.  In re Denton, 15-40452-TLS (Bankr. D. Neb., July 23, 2015).

Bankruptcy, like any other practice of the law, is very unique.  It intertwines with a lot of other areas – contract, divorce, taxes – so it is important to understand how they all interplay with one another.  If you have any questions concerning bankruptcy, please contact LORK.

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