Ninth Circuit Court of Appeals Applies Narrow Interpretation

Chapter 7 Bankruptcy can help debtors to reduce their debt by discharging unsecured debts. An unsecured debt is a debt that does not have an accompanying interest in property. However, certain types of unsecured debts, such as domestic support obligations and payments to former spouses, are exempt from discharge under the U.S. Bankruptcy Code. This means that a debtor who has gone through bankruptcy will typically still have an obligation to pay debts like child support or alimony during and after the bankruptcy.

Ninth Circuit Court of Appeals Applies Narrow Interpretation

With regard to these types of debt, section 523(a) of the Bankruptcy Code states that a debtor cannot discharge debt that exists:

1) For a domestic support obligation; or

2) To a spouse, former spouse, or child of the debtor that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree, or other order of a court of record.

This definition of debts that are not dischargeable may seem simple. However, sometimes in bankruptcy complicated situations arise and it is unclear exactly how the law applies. This is exactly what happened in a recent Ninth Circuit case.

Does the Exception Include Debts Owed to the Former Spouse of a Spouse?

In re: Gunness, a recent case from the Ninth Circuit, addresses the novel issue of whether the exception preventing discharge of domestic support obligation debt includes debt owed to the former spouse of a spouse.

At the time of her bankruptcy, the debtor, Mrs. Gunness, was married to one Mr. Bendetti. Mr. Bendetti and Mrs. Gunness together owed Mr. Bendetti’s ex-wife about $280,000. The debt was the result of attorney’s fees for a former lawsuit in which Mr. Bendetti’s ex-wife alleged that he fraudulently transferred some of their community property to Mrs. Gunness. Mrs. Gunness asked the bankruptcy court to determine whether she could discharge the debt to Mr. Bendetti’s ex-wife in her bankruptcy.

The Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals held that yes, Mrs. Gunness could discharge the debt she owed her husband’s ex-wife. In determining that she could discharge the debt, the court paid attention to two important facts.

First, Mr. Bendetti’s ex-wife was not a “spouse, former spouse, or child” of Mrs. Gunness. Thus, the debt was not “to” a party that was specifically identified within Bankruptcy Code Section 523(a). However, the Ninth Circuit noted that the identity of the person to whom the money was owed is less important than the identity of the party who benefited from the debt.

Second, the money that Mrs. Gunness owed did not go to benefit the “spouse, former spouse, or child” of Mrs. Gunness. Because the debt was not directly payable to a spouse, former spouse, or child, and because the debt did not benefit Mrs. Gunness’ spouse, former spouse, or child, the Ninth Circuit held that she could discharge the debt in her Chapter 7 Bankruptcy.

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