Opinion
Case No. 04-10808-SSM, Adversary Proceeding No. 04-1200.
February 22, 2005
Ann M. Callaway, Esquire, Ann M. Callaway, P.C. Warrenton, VA, Counsel for the plaintiff.
Richard A. Bartl, Esquire, Tyler, Bartl, Gorman Ramsdell, PLC Alexandria, VA, Counsel for the defendant.
MEMORANDUM OPINION
This is an action to determine the dischargeability of obligations arising under a property settlement agreement and divorce decree. A trial was held on November 19, 2004, without a jury. The plaintiff and the defendant were each present in person and were represented by counsel. For the reasons stated, the court determines that the debtor's obligations to maintain health and life insurance for his children and to reimburse his former wife for one-half of their uncovered medical expenses are non-dischargeable, as is his obligation to indemnify her against a $6,500 credit card debt. However, his obligation to indemnify her against a $25,000 to $30,000 mortgage deficiency claim is dischargeable. This opinion constitutes the court's findings of fact and conclusions of law under Rule 7052, Federal Rules of Bankruptcy Procedure and Rule 52(a), Federal Rules of Civil Procedure.
Findings of Fact
The defendant, Jon Michael Smasal ("the debtor") filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code in this court on February 26, 2004. The trustee filed a report of no distribution on April 1, 2004, and the debtor was thereafter granted a discharge of his dischargeable debts on June 8, 2004. His schedules listed a disputed priority claim in the amount of $5,164.83 to his former wife, Kathy L. Hamby, and twenty general unsecured claims totaling $69,010.97. This does not include a debt to the debtor's credit union — apparently in the amount of approximately $10,000, although the evidence is not clear — that the debtor did not list because he wanted to exclude it from his bankruptcy. Among the scheduled unsecured debts were the following:
This was actually the debtor's third bankruptcy filing since 1999. His first case, No. 99-11629, was filed under chapter 7 on April 1, 1999. It was converted to chapter 13 on July 7, 1999, at the debtor's request but was then dismissed on August 3, 1999, after the debtor failed to file a repayment plan. The second case, No. 03-15141, was filed under chapter 7 on November 11, 2003. It was dismissed on December 15, 2003, after the debtor failed to attend the meeting of creditors.
The complaint alleges that the debtor "has not listed [Ms. Hamby] as a creditor in his lists and schedules." Complaint ¶ 3. This is not true. She is listed as a creditor and was given notice by the clerk of the commencement of the case.
Creditor Amount
Bank of America (f/k/a NationsBank) $24,717.44 First USA Visa $5,744.97 MBNA America $9,240.75
The plaintiff, Kathy L. Hamby, previously known as Kathy L. Smasal, is the debtor's former wife. They were divorced on December 30, 1998, by the Circuit Court of Fauquier County, Virginia. The divorce decree affirmed, ratified, and incorporated a written property settlement agreement signed November 7, 1997, and a subsequent support settlement agreement signed November 3, 1998. Relevant to the present controversy, the agreements require the debtor to pay Ms. Hamby $900.00 a month in child support for their three children and to pay one-half of any unreimbursed medical and dental expenses; to maintain existing health insurance; to maintain existing life insurance policies with the children as beneficiaries; to pay, and to indemnify and hold Ms. Hamby harmless against, what the agreement describes as joint debts owed to NationsBank, MBNA America, Norwest Mortgage, Inc., and Visa; and to pay reasonable attorney's fees in connection with any breach of the agreement.
The debtor has been employed by Federal Express for 18 years. He is in good health and expects to work for the company for another 12 to 15 years. His pay varies from month to month depending on the amount of overtime. His W-2 income and adjusted gross income ("AGI") for Federal income tax purposes for the three years prior to the bankruptcy filing were as follows:
Year W-2 Wages AGI
2001 $46,006.04 $46,318 2002 $51,088.98 $50,947 2003 $48,595.41 $60,998
The large difference between W-2 wages and AGI in 2003 is the result of approximately $14 thousand in distributions — most of it taxable — that he received from an IRA in that year. In any event, the wages shown on the tax returns somewhat understate his actual gross pay, since his 401(k) plan contributions are pre-tax deductions. His true gross pay, which is shown on the W-2 forms as "Social Security Wages," is as follows:
Because this appears to be a one-time event, the court has not considered it in computing the debtor's current monthly income.
Year Gross Wages
2001 $48,492.77 2002 $55,135.96 2003 $50,294.91
He expects his employment income for 2004 to be essentially the same as 2003. He did not place any recent pay stubs into evidence, however. His bankruptcy schedules — which he testified at trial were accurate — show the following as his current monthly income and expenses:
Income
Wages $3,620.00 Overtime $200.00 Payroll deductions Withholding ($739.14) Insurance ($308.32) Child support ($900.00) 401(k) ($105.87) Credit Union ($609.61) ____________ Net take-home pay $1,157.06Expenses
Rent $600.00 Telephone $60.00 Food $400.00 Clothing $40.00 Transportation $60.00 Auto insurance $30.00 ____________ Total Expenses $1,190.00
Excess or (Shortfall) ($32.94)
His bankruptcy schedules further reflect that on the filing date he owned no real estate; had $450.00 in a bank account; owned a boat, motorcycle, and two other motor vehicles worth a total of $3,100; owned $300.00 worth of Federal Express stock; and had $24,000.00 in a 401(k) retirement account. The debtor lives with his mother and testified that $600 a month was what he paid her for rent, although he admitted that the payment was also repayment for money she had loaned him. There was no evidence, however, that he could have found a commercial rental for an amount less than what he was paying his mother.
The debtor's bank account statements, which were placed in evidence, reflect that his actual weekly take-home pay (which was direct-deposited to his checking account) varied considerably over the seven-month period from January 9th through August 4th, 2004. The low was $155.94 and the high was $488.12, with the average for the period being $293.83 per week. Based on 4.33 weeks to the month (52 weeks in a year divided by 12 months), his average monthly take-home pay for the period was $1,272.28. In addition to the $8,887.79 in wages, the bank statements reflect additional deposits of $17,909.73 into the account during the seven-month period. Payments from the account (checks, ATM withdrawals, debit card purchases, and electronic bill payments) for the same period totaled $27,550.06. This includes a $5,164.83 payment in June 2004 which appears to be the amount the debtor paid Ms. Hamby after she brought a rule to show cause against him for non-payment of the unreimbursed medical expenses. The debtor testified that $16,200 of the deposits into the account consisted of money loaned to him by his mother; that $800 was a transfer from his credit union account; and that $843 was the proceeds from the sale of stock.
A table and graph prepared by the court from the account statements are attached to this opinion showing the weekly amounts paid to the debtor by his employer.
An summary of the account activity prepared by the court from the account statements is attached as an exhibit to this opinion.
On cross-examination, the debtor admitted that he owned or had possession of four automobiles (a Porsche 914, an Austin-Healey "bug-eye" Sprite, an MG Midget, and a second Mazda RX-7) that were not listed on his bankruptcy schedules. He explained that he had inherited the Porsche from his younger brother; that he "forgot" to list the MG, and that the Sprite was "not a running vehicle" and was a "collector-type vehicle." He also admitted that he had a safe in which he kept a coin collection that had belonged to his deceased father and that he expected would become his when his mother died. His bank statements reflect substantial payments for car parts and repairs.
The debtor testified that any liability on the Norwest Mortgage debt mentioned in the property settlement agreement had been extinguished as a result of a foreclosure that took place approximately five years ago. He testified that he was present at the sale; that the winning bid was in the range of $133 to $135 thousand; that the balance owed on the deed of trust at the time was approximately $127 thousand; and that he had never been notified of any deficiency claim. Ms. Hamby presented no evidence to the contrary and, like Mr. Smasal, she has never been notified of any deficiency claim.
With respect to the MBNA America credit card, the debtor testified that the account was solely in his name; that he was the only party contractually liable for its payment; and that he was also the only authorized user of the account. Again, Ms. Hamby presented no evidence that she is, or ever has been, liable on the account or that she has ever been dunned or sued for its payment.
The debtor acknowledged that he and Ms. Hamby were jointly liable on the First USA Visa credit card account and on the Bank of America (formerly NationsBank) claim. The debtor testified that the Bank of America claim arose from a home equity line of credit that was not paid when the property went to foreclosure. He testified that the claim was in the range of $24 to $25 thousand, and that $11 thousand of the loan proceeds had been used to pay off an existing loan on a Plymouth minivan. Ms. Hamby subsequently traded in the minivan for a $2,500 credit on the purchase of a new Geo automobile in 1997.
The minivan was titled jointly in the name of the debtor and Ms. Hamby. The debtor testified that Ms. Hamby forged his signature on the assignment of title without his knowledge or consent, while she testified that he had authorized her to sign his name. The property settlement agreement, however, was signed some three months after the trade-in and recites that the parties had already divided their tangible personal property, and that each party would hold "as his or her sole and separate property" the property in his or her possession. There is no suggestion that the minivan was not then in Ms. Hamby's possession. Additionally, the agreement provides for the parties to execute appropriate documentation to title a boat and three specific motor vehicles solely in the debtor's name. If the debtor had been under the belief that the minivan was still jointly titled, it is curious, to say the least, that he would have signed a property settlement agreement that failed to mention it. The court can only conclude, therefore, that by the time the debtor signed the property settlement agreement and agreed to pay the NationsBank debt, he was fully aware that the minivan (which was not collateral for the NationsBank loan in any event) had been disposed of. Accordingly, whether or not the trade-in was originally done with his knowledge and consent is irrelevant, since the agreement effectively constituted a waiver of any claim by him to the minivan.
Ms. Hamby has received a dunning notice from a collection agency with respect to the delinquent First USA Visa. The amount shown due, as of January 3, 2004, was $6,374.94, although Ms. Hamby was offered a 35% discount if she paid within 30 days. In July 2003, she was sued by Bank of America in the Circuit Court of Fauquier County for $24,714.44 plus 20% attorney's fees. No evidence was presented as to the disposition of that suit.
Ms. Hamby testified that she has physical custody of the three children (ages 13, 15, and 17) that were born of her marriage to the debtor. Subsequent to the divorce, she has remarried and is helping to raise her new husband's two daughters (ages 11 and 14). Her new husband is chief estimator for a hearing and air conditioning company and is the sole wage-earner for the family. No testimony was presented as to the amount of his income. Although she was employed at the time the property settlement agreement was signed, Ms. Hamby testified that she does not currently work outside the home because she has been battling ovarian cancer for the last two years. She further testified that she has no savings and no source of income other than the $900 in monthly child support she receives by wage deduction from the debtor's pay. As of the trial, she had incurred $2,748.21 in legal fees pursuing her show cause action against the debtor in state court and $3,194.44 in pursuing her dischargeability complaint in this court.
The bills placed in evidence actually total $3,523.21. However, $775.00 of the charges are for preparation of wills and durable powers of attorney for Ms. Hamby and her husband, matters for which the debtor obviously has no duty to indemnify Ms. Hamby.
Conclusions of Law and Discussion I.
This court has subject-matter jurisdiction under 28 U.S.C. §§ 1334 and 157(a) and the general order of reference from the U.S. District Court for the Eastern District of Virginia dated August 15, 1984. An action to determine the dischargeability of a debt is a core proceeding in which a final judgment or order may be entered by a bankruptcy judge. 28 U.S.C. § 157(b)(2)(I). Venue is proper in this district under 28 U.S.C. § 1409(a). The defendant has been properly served and has appeared generally.
II.
Two types of divorce-related debts survive a chapter 7 bankruptcy discharge. The first category consists of debts "to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record[.]" 11 U.S.C. § 523(a)(5). The second category consists of debts, other than support debts, "incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record[.]" 11 U.S.C. § 523(a)(15). The latter, however, is subject to the exception that such debts will be discharged if
(A) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor and, if the debtor is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business; or
(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor[.]
Id. Thus, debts for spousal or child support are never dischargeable, but other types of divorce-related debts, including property settlements or equitable distribution judgments, will be discharged if the debtor cannot afford to pay them or if the benefit to the debtor from discharging them outweighs the detriment to the other party.
III.
The debtor does not dispute that the obligation to pay $900.00 a month in child support and to pay one-half of the unreimbursed medical expenses for the children is in the nature of support and therefore nondischargeable under § 523(a)(5). While the debtor did not specifically concede that the obligation to maintain health insurance and the existing life insurance for the benefit of the children is likewise in the nature of support, he did not seriously contend otherwise, and the court has little difficulty in concluding that the obligation to maintain the insurance is nondischargeable under § 523(a)(5).
In this connection, an obligation may be in the nature of support, so as to be nondischargeable under § 523(a)(5), even if not specifically denominated as support in a property settlement agreement or divorce decree. Melichar v. Ost (In re Melichar), 661 F.2d 300, 303 (4th Cir. 1981) ("The proper test of whether the payments are alimony lies in proof of whether it was the intention of the parties that the payments be for support rather than as a property settlement.") (decided under Bankruptcy Act of 1898); Tilley v. Jessee, 789 F.2d 1074, 1077 (4th Cir. 1986) ("[T]he true intent of the parties rather than the labels attached to an agreement or the application of state law [controls]"); Long v. West (In re Long), 794 F.2d 928, 931 (4th Cir. 1986) (intent of divorce court governs where obligation arises from that court's decree). The burden of showing that a particular obligation is in the nature of alimony, maintenance, or support is on Ms. Hamby, as the party opposing the dischargeability of the debt. Long, 794 F.2d at 930.
In the present case, neither party presented any evidence as to their intent in negotiating the requirement to maintain the health and life insurance. However, it seems almost self-evident that both obligations are in the nature of support. After food, shelter, and clothing, few needs of minor children are more basic than that of adequate medical care and treatment. Because the payment of the children's necessary medical needs, whether indirectly (through maintenance of health insurance coverage) or directly (though payment of the agreed percentage of any unreimbursed costs) satisfies one of the most fundamental duties owed by a parent to a child, it will almost always constitute an obligation in the nature of support. The analysis with respect to the life insurance obligation is somewhat different, but the result is the same. The obligation to make child support payments terminates upon the paying parent's death. However, the child's needs do not. Life insurance is the obvious means of ensuring that money is available to support the child and pay for its basic needs in the event of the supporting parent's untimely death. There is no evidence that the face amount of the life insurance in this case greatly exceeds any likely support obligation. Accordingly, the court concludes that the obligation to maintain the life insurance, like the obligation to maintain the health insurance, is in the nature of support and is therefore nondischargeable under § 523(a)(5).
IV.
Ms. Hamby does not contend that the indemnity and hold harmless obligations with respect to the Bank of America, First USA Visa, MBNA America, and Norwest Mortgage, Inc., debts are in the nature of support. Accordingly, the dischargeability of the indemnity obligation is governed by § 523(a)(15), Bankruptcy Code.
It is worth emphasizing that this adversary proceeding is not concerned with the debtor's liability to the underlying creditors but only with his obligation to Ms. Hamby to indemnify and hold her harmless from the debts in question. Regardless of whether the indemnity obligation is held non-dischargeable, the debtor's direct liability to the creditors in question has been discharged.
A.
As noted, divorce-related debts, other than those for support, are non-dischargeable unless the debtor can show that he is unable to pay them or the benefit to him from discharging them outweighs the detriment to the other party. The debtor bears the burden of proof, by a preponderance of the evidence, both as to his inability to pay and as to the benefit of discharge outweighing the detriment to the nondebtor party. Sparagna v. Metzger (In re Metzger), 232 B.R. 658, 663 (Bankr. E.D. Va. 1999); Craig v. Craig (In re Craig), 196 B.R. 305, 308-09 (Bankr. E.D. Va. 1996); King v. Speaks (In re Speaks), 193 B.R. 436, 441 (Bankr. E.D. Va. 1995). But see Collins v. Hesson (In re Hesson), 190 B.R. 229, 239 (Bankr. D. Md. 1995) (debtor has burden on inability to pay but nondebtor has burden to prove that detriment outweighs benefit of discharge). Because § 523(a)(15) is phrased in the disjunctive, however, a debtor need prove only one of the two possible grounds for discharging the debt. Metzger, 232 B.R. at 663; Craig, 196 B.R. at 309. With regard to ability to pay, the test is not whether the debtor has the ability to pay the debt as of a particular time — such as the date of trial — but whether the debtor can pay the debt over time. Metzger, 232 B.R. at 663; Craig, 196 B.R. at 310. "A debtor is able to pay if, `after taking into account all reasonably necessary living expenses of the debtor and his or her dependents, there exists disposable income from which the debt could be paid.'" Paul v. Forman (In re Forman), 260 B.R. 758 (E.D. Va. 1999), aff'd, 217 F.3d 838 (4th Cir. 2000); Metzger, 232 B.R. at 663. In determining whether the benefit to the debtor from discharging the debt would outweigh the resulting detriment to the nondebtor party, courts consider the totality of the circumstances, including the income and expenses of both parties, whether the nondebtor spouse is jointly liable on the debts, the number of dependents, the nature of the debts, the reaffirmation of any debts, the nondebtor spouse's ability to pay, and whether the debt can actually be collected from the nondebtor spouse. Craig, 196 B.R. at 309.
B.
In applying the ability-to-pay test, it is necessary to first determine the amount of the obligation and second the amount of the disposable income from which the debtor could pay the debt. Where there are multiple liabilities, a separate analysis must be done with respect to each one. See Metzger, 232 B.R. at 663 (holding that debtor had ability to pay one $2,749 credit card debt but discharging debtor's liability with respect to a second $2,087 credit card obligation).
The evidence is unrebutted that the Norwest Mortgage note was satisfied by foreclosure and that there is no known deficiency claim. Likewise, the evidence is unrebutted that Ms. Hamby has no personal liability on the MBNA America credit card debt. Since Ms. Hamby has no current liability on either debt, there is nothing for the debtor to indemnify and hold her harmless against. That leaves the First USA Visa credit card account and the Bank of America deficiency claim. There is no dispute that the debtor has not paid either claim and that both creditors have made demand on Ms. Hamby for payment. While the testimony is insufficient to determine an exact amount due on each obligation, there seems to be no dispute that the First USA Visa obligation is in the approximate amount of $6,500 and that the Bank of America obligation is in the approximate amount of $25,000.
The next question is what disposable income or other assets does the debtor have that could be used to pay these claims, at least over time if not immediately. Because the debtor's income schedule is inconsistent with his W-2 forms and further appears to doublecount the 401(k) deduction (which, as noted, is already deducted from gross wages to give taxable wages), the court has recalculated the monthly amounts based on the W-2 form for the most recent year (2003), as well as the monthly amounts — which Ms. Hamby has not challenged — for the child support and insurance deductions on the debtor's schedules:
Description Annual Monthly
Gross (incl. overtime) $50,294.91 $4,191.24 Fed. Income tax withholding ($5,560.40) ($463.37) Soc. Sec. withholding ($3,118.28) ($259.86) Medicare withholding ($729.28) ($60.77) Va. Income tax withholding ($2,377.37) ($198.11) 401(k) plan contribution ($1,699.00) ($141.58) ___________________________ sub-total $36,810.58 $3,067.55 Insurance ($308.32) Child support ($900.00) ___________ Net income $1,859.23
This does not include the allotment to the credit union, for the simple reason that the credit union debt was an apparently-dischargeable debt that the debtor deliberately chose to "exclude" from his bankruptcy and has voluntarily continued to pay. Such a claim is entitled to no legal or moral priority over Ms. Hamby's claim. For that reason, the court treats the money currently being paid to the credit union as funds available to satisfy the debtor's indemnity obligation to Ms. Hamby.
On the present record, the court makes no finding as to whether the credit union liability has been discharged. The fact that the credit union was not listed as a creditor is not determinative of the issue, since in a "no-asset" case in which no bar date has been set for filing claims, unlisted debts are discharged unless they would independently be non-dischargeable under § 523(a)(2), (4), or (6) or some other provision of the Bankruptcy Code. In re Woolard, 190 B.R. 70 (Bankr. E.D. Va. 1995).
The debtor's listed expenses total $1,190.00. This figure, however, does not include the unreimbursed medical expenses he is required to pay under the terms of the property settlement agreement and court decree. Neither party has provided sufficient evidence to allow a precise calculation of this amount (which would obviously vary from month to month in any event). Ms. Hamby testified that at the time she brought a rule to show cause against the debtor in state court, the unpaid amount was $2,700. The testimony was unclear, however, over what period of time this arrearage had accrued, but it would appear to have been at least two years. One of her exhibits consisted of bills covering an approximately one-year period for which the debtor's half share of the unreimbursed liabilities was $985. The $2,700 figure would work out to approximately $225 per month, while the $985 figure would equate to approximately $82 per month. In the absence of additional evidence that would permit a more accurate determination, the court finds that $125 per month is a reasonable estimate of the unreimbursed medical costs. Adding that figure to the expenses listed by the debtor gives the following:
Expenses
Rent $600.00 Telephone $60.00 Food $400.00 Clothing $40.00 Transportation $60.00 Unreimbursed medical $125.00 Auto insurance $30.00 _____________ Total Expenses $1,315.00
The evidence shows that the debtor spends a good deal more than this a month — much of it on parts and repairs for his automobile collection — and that he relies to a great extent on money borrowed from his mother to make ends meet. But the fact that the debtor does not live frugally or does not properly manage his finances does not equate to an inability to pay. The test, rather, is whether his disposable income — that is, gross income minus required deductions and reasonably necessary living expenses — is sufficient to pay the claim over time.
It is necessary, however, to distinguish between historical fiscal mismanagement that may have placed a debtor in a position in which he or she has no disposable income, as opposed to a current failure by the debtor to live within his or her means. The district court held in Forman that the debtor's alleged past fiscal mismanagement and incompetence — which his former wife argued constituted "bad faith" such as to preclude discharge of an obligation to pay one-half of certain marital debts — was immaterial to the determination of the debtor's ability to pay. Forman, 260 B.R. 762 ("[E]ven if the bankruptcy court had found bad faith, it would not have affected the determination of ability to pay.") Thus, in general it would not be proper to make a finding of ability to pay based on imputed income where the debtor has made a bad career choice by, for example, quitting a well-paid job to take another that turned out badly. Here, by contrast, the court's calculation of disposable income is based on what the debtor actually earns.
With respect to the First USA Visa account, the evidence shows that the debtor has the ability to pay the debt, at least over time. Even before consideration of the 401(k) deduction, the debtor has $544 a month in disposable income after backing out the credit union allotment. Monthly payments of $500 a month would retire the First USA Visa account in approximately 16 months even with interest continuing to accrue. Thus, the court has little difficulty in concluding that the debtor has the ability to pay the claim.
The reason the court has rounded down from the $544 figure is that it is based on a mathematical "average" month's income. Since the debtor's actual income in any particular month can vary considerably from the mathematical average, it seems both reasonable and prudent to provide a cushion for such variation by using a payment amount that was likely to be available even in months the debtor's income fell below the average.
No evidence was presented as to the interest rate on the account. But even assuming a default interest rate as high as 24% (which this court frequently sees on credit card debt), $500 a month would pay a $6,500 balance in 15.2 months.
Simply because of its size, the $25,000 Bank of America deficiency claim — which would be closer to $30,000 once the claimed 20% attorney's fees are added — obviously poses a more difficult question. There is no evidence in the record as to the interest rate for this debt, but if one were to assume a 9% annual rate (which would not be unusual for a home equity line of credit), and payments of $600 per month, it would take approximately 63 months to pay off the debt. That does not, of course, take into account either the payment of the First USA Visa debt or the nearly $6,000 in attorney's fees incurred by Ms. Hamby in the state court show cause proceeding and this adversary proceeding. To pay off both the First USA Visa debt and the Bank of America debt (including interest) at $600 a month would require something closer to 94 months, or nearly eight years. Even though the test does not require ability to pay immediately but rather over time, the reported cases in this district finding an ability to pay over time have involved much shorter repayment periods. See Metzger, 232 B.R. at 665 ("25 months"); Craig, 196 B.R. at 310 ("two or three year period"). The court does not suggest that there can be a bright-line rule in this regard, however. A longer period might well be appropriate in certain circumstances, particularly where the debtor is highly compensated or has substantial borrowing capacity. But that is not the case here. Having considered all the circumstances, the court is constrained to find that the debtor does not have the financial ability to pay the Bank of America debt over a reasonable period of time. For that reason, he is entitled to a discharge of his liability to indemnify Ms. Hamby from the debt.
Specifically, if the $600 were split so that $154 a month were applied to the $6,500 First USA Visa account (assuming 24% annual interest) and $446 a month to the $30,000 Bank of America account (assuming 9% annual interest), both would be paid off in 94 months.
The $600 per month figure that the court has used to determine the hypothetical repayment period for the Bank of America debt assumes that the $105.87 per month the debtor is currently paying into his 401(k) plan is not a "reasonably necessary" expense and should therefore be treated as disposable income. Because the court finds that the debtor does not have the ability to pay the Bank of America debt even eliminating the 401(k) contribution, the court need not reach that issue. The court simply notes that the extent to which payments, whether voluntary or involuntary, into a retirement plan should be considered a reasonably necessary living expense is a question that has divided the courts. The majority rule appears to be that voluntary retirement plan contributions are never "reasonably necessary." See, e.g., In re Nation, 236 B.R. 150, 152 (Bankr. S.D.N.Y. 1999); In re Watkins, 216 B.R. 394, 396 (Bankr. W.D. Tex. 1997); In re Festner, 54 B.R. 532, 533 (Bankr. E.D.N.C. 1985); In re Fountain, 142 B.R. 135, 137 (Bankr. E.D. Va. 1992). Other courts, however, have criticized the use of a per se rule and have called for a case-by-case analysis. See, e.g., N.Y. City Employees' Ret. Sys. v. Sapir (In re Taylor), 243 F.3d 124, 129 (2nd Cir. 2001); In re Vansickel, 309 B.R. 189, 200-10 (Bankr. E.D. Va. 2004). In Vansickel, Judge Mayer, after an extensive analysis of the case law, suggested that the primary considerations for distinguishing abusive from non-abusive retirement contributions were the age of the debtor, the expected time until retirement, the existence and extent of other retirement plans, the amount of the contributions, and the debtor's overall budget. Vansickel, 309 B.R. at 209. In the present case, there is no evidence as to the amount of retirement benefits the debtor could expect from his employer. On the assumption that the debtor's contributions into the 401(k) plan supplement an employer-provided retirement plan and do not constitute the debtor's sole source of income (other than social security) in his retirement years, and given the debtor's testimony that he anticipated working another 12 years or so, the court would likely find that the 401(k) contribution, although modest, should nevertheless properly be included in disposable income. See id. at 210 (determining that 3% voluntary contribution to federal employee's Thrift Savings Plan should be treated as disposable income). If the issue were to rise in the context of a repayment period longer than that of a typical chapter 13 plan, however, the court might reach a different conclusion.
C.
Although the court has found that the debtor has the ability to pay the First USA Visa debt, his obligation to Ms. Hamby for its payment will nevertheless be discharged if the benefit to the debtor from discharging the debt outweighs the detriment to her. The benefit to the debtor of discharging the debt is self-evident. The debtor is a person of very modest income and will have to struggle to pay the debt, which the court has found he can only do over time and not immediately. He would be restricted while paying the debt to a relatively frugal standard of living that leaves no margin for financial setbacks. As the Supreme Court observed some seventy years ago, the purpose of a bankruptcy discharge is to give the honest but unfortunate debtor "a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt." Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934). For the debtor to remain saddled with this debt will likely leave him subject to continuing financial pressure.
Nevertheless, there must be more than simply a benefit to the debtor in order to discharge the debt. As noted, the benefit must outweigh any detriment to Ms. Hamby. In this connection, the evidentiary record is somewhat sparse. For example, where the beneficiary has remarried, courts commonly consider the income and expenses of the beneficiary's new family in determining whether, and to what extent, the beneficiary will be adversely affected. So, for example, if the beneficiary has married a millionaire, the detriment from discharge may be small. At the other end of the financial spectrum, the beneficiary may have so few assets as to be judgment proof. Or the beneficiary may have so many other debts such that his or her own filing for bankruptcy would eliminate any detriment from the debtor's failure to pay. Finally, where there is no likelihood that the beneficiary of an indemnity obligation will ever, as a practical matter, be required to pay the obligation, the detriment from discharge is likely to be outweighed by the benefit to the debtor.
While there is testimony in the record that Ms. Hamby herself earns no income, there was no evidence as to the family's standard of living, and to what extent it would be impacted by the debtor's failure to pay the debt to First USA Visa. Nevertheless, it is the debtor who has the burden of proving that the benefit of discharge outweighs the detriment to Ms. Hamby. He has not shown that Ms. Hamby has the financial resources to pay the debts herself or that she would not as a practical matter be required to pay them. Nor has he shown that there is such disparity in their relative financial circumstances that discharge benefits him more than it hurts her. Accordingly, the court concludes that the debtor has not carried his burden of proving that the benefit to him of discharge outweighs the harm to Ms. Hamby with respect to this obligations.
Because the court has found that the debtor does not have the ability to pay the Bank of America debt, the court need not decide whether the benefit to the debtor of discharge outweighs the detriment to Ms. Hamby. Forman, 260 B.R. at 762 ("The two exceptions are listed in the disjunctive, thus, it is not necessary for a court to find the presence of both (A) and (B) in determining dischargeability."). The court only notes that although the magnitude of the Bank of America debt obviously enhances the benefit to the debtor of discharge, the resulting detriment to Ms. Hamby would also increase. Thus, it seems likely, if the court were required to reach the issue, that the benefit of discharge could not be found to outweigh the harm to Ms. Hamby.
V.
The court addresses separately the issue of attorney's fees. As noted, the property settlement agreement allows Ms. Hamby to recover attorney's fees for breach of the agreement. Of course, as regards any failure by the debtor to pay child support, the state court presumably has the power to award attorney's fees even in the absence of a contract. So it is only with respect to the indemnity and hold harmless obligations that this court must be concerned. As noted, Ms. Hamby produced evidence at trial that she has incurred almost $6,000 in attorney's fees related to the state court show cause proceedings ($2,748.21) and this adversary proceeding ($3,194.44). The record is silent as to whether the show cause proceeding was concerned only with the unreimbursed medical expenses or also raised the indemnity and hold harmless claims. The time entries on the billing statements for the adversary proceeding appear to relate primarily to the dischargeability of the indemnity claims rather than the support claims.
An earlier petition to show cause that was filed in September 1999 after the debtor filed his first bankruptcy petition concerned only the indemnity obligations. However, that show cause was dismissed in October 1999.
A.
With respect to the $2,748.21 in claimed fees for the show cause proceeding, the court would have to conclude that the debtor has the ability to pay them. Even assuming, without deciding, that they could be discharged, the court cannot find that the benefit of discharge outweighs the detriment to Ms. Hamby. The proper amount of those fees is an issue more appropriately determined by the Circuit Court of Fauquier County.
It is well settled in this Circuit that attorney fee awards incurred in a proceeding to establish or enforce support may themselves constitute support within the meaning of § 523(a)(5) and thus be nondischargeable. Silansky v. Brodsky, Greenblatt Renehan (In re Silansky), 897 F.2d 743 (4th Cir. 1990); Roberson v. Roberson (In re Roberson), 187 B.R. 159, 163 (Bankr. E.D. Va. 1995).
B.
With respect to the fees for this adversary proceeding, Ms. Hamby has placed in evidence billing statements from her attorney reflecting 13.2 hours of attorney time at $225.00 per hour, 0.6 hours of paralegal time at $75.00 per hour, and $179.44 in reimbursable costs (postage and filing fees) from January through August 2004. The billing statements, however, do not cover the preparation of exhibits and witness lists, attendance at the final pretrial conference in October 2004, final trial preparation, or conduct of the trial itself. While the court could estimate the time involved, the court is disinclined to do so and will require counsel to file and serve a formal motion for an award of attorney's fees in connection with the present litigation. The court will then evaluate the fee request in light of the factors set forth Barber v. Kimbrell's, Inc., 577 F.2d 216, 226 n. 28 (4th Cir. 1978).
In any event, for the purpose of the present ruling, the court assumes that the award of fees is likely to be in the neighborhood of $5,000. In light of the ruling with respect to the Bank of America debt, the court is unable to find that the debtor would not be able to pay this relatively modest amount of attorney's fees, at least over time. Obviously, if the ruling with respect to the Bank of America debt were reversed on appeal, the court would have to revisit the issue of the attorney's fees, since at that point an additional $5,000 obligation on top of the substantial First USA Visa and Bank of America debt might well be the feather that breaks the camel's back. Additionally, at that point the balancing test might well weigh in favor of discharge, since in fact Ms. Hamby has already paid the fees. In this connection, the billing statements placed in evidence show that she paid a $5,000 retainer to counsel representing her in this bankruptcy case on January 15, 2004, and still had a credit of $1,805.56 on her account when this adversary proceeding was tried. (This is in addition to the $5,000 retainer she paid to the law firm that represented her in the state court proceedings). No evidence was presented that the payment of these retainers had placed the debtor's family in a serious financial bind. Under these circumstances, a strong argument could be made that the benefit to the debtor of discharge outweighed the detriment to Ms. Hamby. However, the court need not reach that issue unless the ruling with respect to the Bank of America debt is reversed.
VI.
In summary, the court determines that the debtor's obligation under the property settlement agreement and divorce decree to make periodic child support payments, to pay one-half of the unreimbursed medical expenses for the children, to maintain health insurance for the children, and to maintain life insurance with the children as beneficiaries, is nondischargeable under § 523(a)(5). The court further determines that the debtor has the ability to satisfy, at least over time, the First USA Visa debt, and that the benefit to the debtor from discharging his obligation to indemnify Ms. Hamby against that debt does not outweigh the resulting detriment to Ms. Hamby. The court also determines, however, that the debtor does not have the ability to satisfy the Bank of America debt. Thus, the debtor's indemnity obligation with respect to the First USA Visa debt is nondischargeable under § 523(a)(15), while his obligation with respect to the Bank of America debt is dischargeable. A separate judgment will be entered consistent with this opinion.