Existence of a Debt Upon Divorce
(Provided by National Legal Research Group, Inc.)

The first step in dividing an asset is to determine whether the asset meets the definition of "property." Some interests, such as professional degrees and future gifts and inheritances, are too speculative to constitute property.

By the same logic, "[t]he first step in dividing the parties’ marital debts is to determine whether a debt actually exists or not." Ketchum v. Ketchum, 2003 WL 21134713, at *6 (Ohio Ct. App. 2003). Just as some parties seek a more favorable division by concealing assets, other parties will seek a more favorable division by manufacturing debts.

As a general rule, a debt exists only where there is an enforceable legal obligation to pay money to another. One common battleground involving the definition of a debt is transfers from close family members. The spouse whose family provided the funds often claims that the transfer was a loan which must be repaid. The other spouse often claims that the transfer was a gift.

A good example is Schaefer v. Schaefer, 263 Neb. 785, 642 N.W.2d 792 (2002). There, the husband testified that the parties had borrowed $51,000 from his parents during the marriage. He alleged that his mother kept a balance sheet showing the amount due, but the balance sheet was not produced. The husband "admitted that there were no promissory notes or other documents obligating the repayment of the debt and that the last payment was made 8 years prior to trial." 263 Neb. at 787, 642 N.W.2d at 795. The trial court found no debt, and the Nebraska Supreme Court affirmed:

The only evidence in the record regarding the legal existence of this debt is Joe’s assertion that he intended to fully repay his parents. No payment has been made on any amounts owed for at least 8 years, and neither Joe nor Carla ever signed any document evidencing the debt. Thus, even if any money borrowed was used for marital purposes, there is no evidence in this record to support the existence of an enforceable marital debt. The district court did not err in excluding the purported debt from the marital estate.

263 Neb. at 791-92, 642 N.W.2d at 798. The husband’s argument was probably doomed from its inception, for it faced two impossible obstacles: the lack of any documentation proving the debt, and the failure of the parties to make actual payments on it for at least eight years. See also Grode v. Grode, 543 N.W.2d 795 (S.D. 1996) (husband had made no payments for 14 years on undocumented, alleged loan from his father; error to treat transaction as a debt); Elman v. Elman, 45 P.3d 176 (Utah Ct. App. 2002) (obligation had not been listed on financial statements until after wife filed for bankruptcy, husband told wife that transaction was a gift, and parties made only one payment; proper to find no debt).

Where the obligation is documented or there is a regular history of repayment, the court is likely to find a genuine obligation. In Smith v. Smith, 2002 WL 1900091 (Ohio Ct. App. 2002), the wife’s sister testified that she had loaned the wife approximately $10,500 to pay living expenses during the wife’s pregnancy. The wife and her sister both testified that the wife was expected to repay the sums advanced. In addition, and most importantly, the sister produced a balance sheet of the sort mentioned but not produced in Schaefer. The trial court found a debt, and the appellate court affirmed:

Appellee’s sister produced a ledger sheet that she prepared to keep track of the money as it was repaid. Appellee produced checking account statements that show some of the deposits. Although appellant argues the written proof does not establish $10,500, the testimony of the witnesses was sufficient to establish the full amount of the debt. We find no abuse of discretion in the trial court’s determination that the money was a loan that was marital debt and that appellant should pay half of the amount.

Id. at *2.

It was very important that the balance sheet in Smith was prepared as the individual advancements were made. Contemporaneous documentation is a very important factor in proving a real obligation. See also Sprick v. Sprick, 25 S.W.3d 7 (Tex. App. 1999) (husband borrowed funds from third party on eve of divorce to support his business while he was incapable of working; loan was documented, and third party testified that he expected repayment; proper to find a valid debt).

Where complete documentation suddenly appears well after the fact, however, the courts tend to view the documentation with a careful eye. In Sherrod v. Sherrod, 709 So. 2d 352 (La. Ct. App. 5th Cir. 1998), the husband’s mother advanced the parties $15,276.60 to assist with acquiring a home. The wife was never told that the funds were a loan, and the parties never made any payments to the husband’s mother. At some point after the funds were actually advanced, however, the husband alone signed a promissory note promising to repay the funds. The trial court found no debt, and the appellate court affirmed. "After considering the conflicting evidence presented, the judge refused to consider this as a community debt, finding that there was insufficient proof as to the validity of the note in favor of Marge Sherrod. Based on our review of the record, we cannot say that the trial judge was manifestly erroneous in this determination." Id. at 355; see also In re Blazis, 261 Ill. App. 3d 855, 634 N.E.2d 1295 (1994) (transfers from husband’s mother were not loans where mother’s testimony was vague and actual notes had not been prepared until parties were having marital difficulties).

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