Virginia Equitable Distribution: Apportioning Debt Discharged in Bankruptcy

Let’s assume that we have a married couple.  They jointly own a home and are jointly liable on all debts encumbering it, including the mortgage and home equity line of credit.  They are individually and jointly liable on various other debts, including some notable credit card debt.  The parties then separate in anticipation of their inevitable divorce.  Wife files for divorce.  Husband files for bankruptcy.  Wife does not file for bankruptcy.  Wife’s equitable distribution case is stayed by the trial court until after Husband has his debts discharged pursuant to his bankruptcy filing, including his obligations to the lender of the mortgage and home equity lines of credit encumbering the marital residence.  Wife therefore becomes solely liable to the lender for the mortgage and home equity lines of credit.  Wife, at their divorce trial, argues that the mortgage and home equity lines of credit are marital debts that the court must apportion between her and Husband.  Husband argues that he can’t be held liable on these debts to Wife because his liability was discharged pursuant to his bankruptcy filing and he is entitled to the fresh start that federal bankruptcy law intends to provide debtors like him.  So must the trial court apportion the mortgage and home equity line of credit debt between these parties per Va. Code § 20-107.3(E) or does federal bankruptcy law’s fresh start preempt the state trial court’s legislative mandate?

In Hughes v. Hughes, Record No. 0267-13-4 (Va. Ct. App. 2013), the Virginia Court of Appeals dodged answering this question outright because the trial court judge first dodged answering many other questions.  At the trial court level, the judge apportioned two credit card debts between the parties.  The judge also awarded Wife the marital home, which had negative equity in excess of $100,000 due to its mortgage and home equity line of credit debt.  The judge, nevertheless, did not explicitly apportion the mortgage and home equity line of credit between the parties or account for these encumberances in dividing the marital property.  Wife, accordingly, left the proceedings thinking that she was solely on the hook for these debts encumbering the marital home.  Wife’s counsel, understandably, thought this odd because it appeared that Wife would be taking on the majority of the marital debt while Husband would be leaving the marriage with little to no debt.  When Wife’s counsel pressured the trial judge to explain whether he was holding that the court was barred from apportioning any part of these debts to Husband, the judge said: “I don’t take your point, Counselor.”  When Wife’s counsel filed a motion for reconsideration of the trial court’s decision, the same judge did not deem it worthy of hearing.  Wife appealed the trial court’s “decision.”

Fortunately, Wife’s counsel appealed looking for answers.  The Virginia Court of Appeals held that it could not answer the first question (i.e., whether the trial court erred in holding that it could not apportion the aforementioned debt because of the bankruptcy discharge) because the trial court erred in not properly accounting for or apportioning the aforementioned debt in the first place.  The interplay between these competing laws is still open for future consideration.