Maintenance Case Analysis

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A question raised by the decision is whether parties getting divorced can ensure that the debts will be nondischargeable in bankruptcy if they merely parrot the exact language used in the case at bar.

An interpretation that they can would be consistent with the parties’ “specific and clear” intent, a primary consideration of the court in the case at bar. However, it would be inconsistent with the rule that “the parties characterization of the obligation is not dispositive,” and the statutory language requiring that the debt be “actually” in the nature of maintenance.

In the case at bar, classification of the debt obligations as a form of maintenance is legitimate. Weaver had significantly more income than Wedeward, and yet no formal maintenance was awarded. Saddling Weaver with a greater proportion of the marital debt, and thus greater monthly payments on the debt, is a legitimate means of equalizing disposable income after subtracting expenses from income, and thereby effecting a form of temporary maintenance.

Suppose, however, that two parties getting divorced have equal incomes and no children, and they divide both the assets (if any) and the debts evenly, including in the settlement agreement the exact same language as in the case at bar — that the debt obligations were nondischargeable forms of maintenance.

Clearly, the parties’ stated intention would be a fiction in such an instance, and could be distinguished from the case at bar. In such a case, the parties are plainly just dividing their debts and assets evenly, not equalizing their post-divorce circumstances.

The question for bankruptcy courts is whether they should ignore the fiction, or perpetuate it. Arguably, the court should hold the parties to their bargain, even though it is just fiction.

Essentially, divorcing parties who sign such an agreement do so in a variation of the Prisoner’s Dilemma.

In the classic Prisoner’s Dilemma, two burglars are arrested and given the third degree. If neither confesses, each will serve one year for carrying a concealed weapon.

If both confess, each will serve 10 years. If one confesses, but not the other, the confessing party will walk free, and the nonconfessing party will serve 20 years.

The best overall case scenario (for the prisoners, not the police) is that neither confesses, and they each serve only one year. However, each individual prisoner is better off if he confesses, regardless of what the other prisoner does (10 years instead of 20, if the other also confesses, and zero versus one year, if the other does not).

Thus, both confess, and both serve 10 years instead of one. Each burglar makes the “rational” choice in the circumstance, even though, if both had acted “irrationally,” both would be better off.

Our hypothetical divorcing spouses are in a similar situation.

Both parties are ultimately better off if they do not classify their debt obligations as a form of maintenance. If one party declares bankruptcy, and has the debt discharged, the creditors will go after the other spouse. Suddenly burdened with twice as much debt as he could handle, that party should then be able to declare bankruptcy, too (unless he has had some sudden windfall of money), and neither spouse pays anything; the creditors eat the loss, and both spouses “win.”

Suppose they declare the debts as maintenance, however, and then both find that they cannot handle their debt loads. They could both declare individual bankruptcy, but it will do them no good. The debts are nondischargeable, and they will remain on the hook for the debts to their creditors; both spouses “lose” and live in perpetual servitude to their creditors.

Thus, it is plainly irrational in the overall scheme of things to classify the debt obligations as maintenance, just as it is irrational for both prisoners to confess.

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Nevertheless, parties will do it anyway, because the potential price of not doing so is to be potentially on the hook for the entire debt if the other party declares bankruptcy (serve 20 years), while the other party pays nothing (goes free for confessing).

Each divorcing party may well view himself as “the responsible spouse,” and the other as an irresponsible spendthrift, notwithstanding the enormous debt the couple has amassed together. As such, each spouse may fear that the other will declare bankruptcy, and the entire debt will fall upon him. Add to that the spite that frequently permeates divorce, and the thought of such a possibility is unthinkable to each.

Thus, the parties agree to do something that may be in neither of their interests, and neither can discharge any debts. Both parties lose, and only the creditors win.

The question for the bankruptcy court is, should it hold the debtors to the bargain they made, even though that means perpetuating the fiction that the debt division was actually maintenance. In doing so, the court would be willfully interpreting the law incorrectly.

Nevertheless, there is a valid reason to do so, with roots in the doctrine of judicial estoppel. Under the doctrine, a party who has successfully put forth a position in one court, is barred from renouncing that position in another court to obtain further benefit.

– David Ziemer

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David Ziemer can be reached by email.