Marital Settlement Agreement Does Not Relieve Debtor of Non-Dischargeable Liability

In U.S. Dep't of Educ. v. Carrion (In re Carrion), BAP No. SC-18-1234-FBKu (May 31, 2019), the Ninth Circuit Bankruptcy Appellate Panel ("BAP") held that a debtor remained personally liable for the entire amount of a student loan debt despite a marital settlement agreement ("MSA") providing for his former wife to assume half of the debt. While married, the debtor borrowed $21,894 from the U.S. Department of Education ("Department") to pay tuition for his son's college education. In June 2011, the debtor and his then wife filed a joint chapter 7 bankruptcy petition, listing the student loan as debt belonging to the debtor husband. Two years later, in their dissolution proceeding, the husband and wife entered into a marital settlement agreement providing that they would each be liable for half of the educational loan. The debtor commenced an adversary proceeding against the Department alleging that the debt was void because the promissory note was executed as a result of identity theft and that the educational debt was discharged. The bankruptcy court rejected the identity theft argument, but found that only one half of the educational loan was nondischargeable under 11 U.S.C. ยง 523(a)(8).

The Department appealed to the BAP, arguing that the full amount of the educational loan was non-dischargeable. The BAP agreed and reversed. The BAP relied on Section 916(a)(1) of the California Family Code, which provides: "[t]he separate property owned by a married person at the time of the division and the property received by the person in the division is liable for a debt incurred by the person before or during marriage and the person is personally liable for the debt, whether or not the debt was assigned for payment by the person's spouse in the division." The bankruptcy court had erred in relying on subsections (a)(2) and (a)(3), rather than (a)(1). The MSA did not relieve the debtor of the debt he owed to the Department. Accordingly, the entire debt was owed by the debtor (and the debtor could seek reimbursement from his ex-spouse).

If you have any questions, please contact Rika M. Kido, Esq., or any of the other attorneys at Shulman Bastian Friedman & Bui LLP at (949) 340-3400. For the full opinion, please click here.

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