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Marital Settlement Agreement – Indemnification Not Automatic; Agreement Unclear; Debtor Includes in Bankruptcy

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Background:

  • Husband and Wife as part of their marital settlement agreement obligated the debtor to pay most of the marital debts
  • Settlement Agreement did not include a hold harmless or indemnification provision.
  • Agreement was incorporated into State Court Order.
  • Ex-wife filed motion in State Court alleging her former husband (Debtor) failed to comply with the State Court order of marital debts.
  • Husband filed Chapter 7 bankruptcy.
  • Ex-wife initiated an adversary proceeding stating she had a claim against her ex-husband (Debtor) based on his failure to pay agreed-upon marital debts and her claim should be excepted from discharge.   Ex-wife based her adversary complaint on premise of the specific terms of the settlement agreement and the Court Order.

Court Ruling:

  • The Court recognized the “new debt”.
  • A “new debt” obligation to a former spouse or spouse is created generally by a hold harmless or indemnification provision within a domestic order or agreement. 
  • This provision was clearly not in the agreement.  
  • Both parties were represented by Counsel.   If either party desired a right to indemnification related to marital debts, then that obligation should have and could have been included.
  • Debtor could include the marital debts in his Bankruptcy case.

I always explain to my clients that, when a written agreement is drafted and signed, you must be very careful that all provisions are clear and spelled out.      An agreement can have either a negative or positive affect on bankruptcy.   Each situation is taken case by case in bankruptcy. Review your agreement with a Certified Bankruptcy Lawyer before you sign.