Debt and Divorce

In Kentucky marital law there is no presumption that debt incurred by one spouse is marital debt and the recent Supreme Court of Kentucky opinion in Rice v Rice, 2009-SC-000730-DG, March 24, 2011 (to be published) reaffirms that doctrine. Sometimes you can tell when a court gets hacked off, and some of that comes through in this opinion written by Justice Noble. One clue as to the court being upset is when they use the word “egregious” and it appears in this opinion.

The husband and wife had been married for 42 years. The wife, Carolyn, worked at an $8.00 an hour job. The husband, Jackie, allowed their adult son to accumulate around $65,000.00 debt by letting him use credit cards and co-signing for loans. This went on for about four (4) years before Carolyn got wind of her husband allowing this mountain of debt to arise and when she confronted Jackie about it, he just changed the mailing address for the bills so she would not find them. Are you starting to see what lead to the divorce?

Anyway, the trial court that granted the divorce assigned each of the parties one half (1/2) of this debt even though Carolyn had not authorized it. The Court of Appeals let that decision stand, but the Supreme Court would not tolerate it. They held that a debt incurred or authorized by one spouse and which the other spouse neither authorized nor received a benefit from is not marital debt.

The reason it was important that Carolyn take her fight to the Supreme Court of Kentucky instead of filing bankruptcy is that the assignment of debt may have been deemed a “domestic support obligation” by the bankruptcy court. So, even though her legal obligation to the creditors may have been extinguished in bankruptcy, she might have remained on the hook to Jackie for around $32,500.00 because domestic support obligations are not discharged.

Fraud or dissipation of assets and divorce

The Kentucky Supreme Court just issued its decision in Gripshover v. Gripshover, (2005-SC-000729-DG & 2006-SC-000258-DG)(Feb. 21, 2008)(to be published). There is a pretty extensive factual background in the published opinion, but unless you either enjoyed reading cases in law school or aspire to enjoy reading cases in law school, I will focus on some key rulings in the case.

Unfortunately, there are spouses who, when they begin contemplating a divorce, engage in fraudulent maneuvering to hide away assets. This can take the form of transferring property belonging to the marital estate so as to exclude it as marital property in the impending divorce. When this dissipation of marital assets occurs, the trial court can recharacterize assets or pull them back into the marital estate in determing a “just” distribution of property.

In Gripshover, the wife alleged that real property transferred into a limited partnership and other property transferred into a trust defrauded her of her marital interest. The Supreme Court disagreed. For a finding of fraud or dissipation, there has to be evidence that the transfers were made in contemplation of divorce and with the intent to impair the other spouses interest. In this case, no such evidence was produced.

While I do not advocate suspicion within a marriage, it is important for both spouses to be understand the ramifications of significant transfers of property. So, I do advocate both spouses being engaged in the finances of the family.