When Bankruptcy Does Not Help?
Chapter 7 bankruptcy has saved many individuals, and then sometimes, the it cannot help at all. It is no secret that today’s real estate market in Florida has plummeted. It is also no secret that the declined market has led to numerous bankruptcies and, in most circumstances, the bankruptcy is able to save the property owners from the negative equity and potential deficiency liability from the properties. However, there are some circumstances where not even a Chapter 7 bankruptcy can allow a fresh start from the property.
One of those circumstances involves obligations to a former spouse arising from a divorce. But what does the declined real estate market have to do with a divorce obligation? Well, imagine the common situation where the spouses own a home during the marriage, one spouse wants to keep the home, and, at the time of the divorce, equity existed in the property.
In this situation, most separation agreements would require the spouse retaining the home pay half the equity to the other spouse within a short period of time to equitably distribute the martial assets. Since the money is tied up in the home, the payment would mostly come from refinancing the home. And the perfect storm begins to form if the divorce occurred shortly before the market crash.
In a recent case decided by the Florida Third District Court of Appeals, the Court has forced a spouse to weather the storm. In Ferguson v. Ferguson, the Third DCA reversed the trial court which allowed the ex-husband out of a $185,000 obligation to his former spouse.
The court rejected the ex-husband’s argument that due to the market decline, he was unable to refinance the home solely in his name and thus cannot pay the obligation bringing about an impossibility of performance (which is a defense to a binding contract). In ruling against the ex-husband, the Third DCA stated the bedrock principle of contract law applies to this case that “bad deals are enforceable in the law as good deals.”
The problem for Mr. Ferguson is if he is unable to net $185,000 from the sale of the home after the mortgage is paid, he will owe his former wife the balance. And, as the obligation arose from a marital separation agreement, the debt is nondischargeable in a Chapter 7 bankruptcy. To discharge this obligation, a debtor could consider filing Chapter 13 and fully complete a confirmed Chapter 13 plan. This is just one example of the intricacies of the Bankruptcy Code and a reason why a debtor should seek experienced bankruptcy counsel.
This Blog was written by Attorney David Fineman, Esq. of The Dellutri Law Group, P.A. Mr. Fineman practices Bankruptcy Law, Fair Credit Reporting Act Law, Fair Debt Collection Practices Act Law and in other areas of Consumer Law.
