Court of Appeals classifies student loans as marital debt
The word ‘crisis’ has become ubiquitous in news stories about unpaid student loans, which now total an estimated $1.2 trillion. But the North Carolina Court of Appeals has introduced a new term into the student loan lexicon: marital debt.
In an opinion issued earlier this month, a unanimous three-judge panel for the court found for the first time that a spouse could be forced to help repay his or her other half’s student loan debts when they divorce.
The June 16 decision in Warren v. Warren was a long time coming, said Raleigh-based family law attorney Lee Rosen.
“I don’t know why it has taken so long for a case like this to go to the Court of Appeals,” he added, “but we really need it now because student loan debt is the biggest consumer loan debt in America.”
Rosen, who was not involved in the Warren case, noted that the decision conflicts with what has become a standard practice for most of his colleagues when they orchestrate divorce settlements.
“It’s fairly typical when cases settle for each party to take their own student loan debt,” he said. “I’ve always been puzzled by that.”
More debt, more money
The husband in the case at hand, Michael Warren, contended that his wife’s $88,429 in student loan debt was separate property because she’d failed to prove that she took out the loans for his benefit as well as her own.
Mary Warren incurred the debt while married and obtaining a master’s degree in occupational therapy from Lenoir-Rhyne University in Hickory. She graduated in 2009 and the marriage dissolved in March 2011.
Before the separation, Mary found work as an occupational therapist and initially made about $34 an hour but later found another job in the same field that paid $60 an hour. She was making $65,000 a year when she and Michael parted ways. He brought home about $100,000 a year.
Michael argued on appeal that the trial court had wrongly determined that Mary’s student loans were marital debt based, in part, on an unpublished state Court of Appeals decision last year in Baldwin v. Baldwin.
The court held that even though a wife had incurred student loan debt during the marriage, she failed to prove that the loans benefited her husband, therefore the loans could not be classified as marital debt.
The wife in Baldwin obtained a master’s degree but, unlike Mary, testified that the degree did not help her find employment or earn more money.
Enjoying the benefits
In deciding Warren, state Court of Appeals Judge Ann Marie Calabria, who wrote the opinion, considered decisions from appellate courts in Colorado, Louisiana and Missouri.
She determined that “in order for the court to classify student loan debt as marital debt, the parties must present evidence regarding whether the marriage lasted long enough after incurring the debt and receiving a degree for the married couple to substantially enjoy the benefits of the degree or higher earnings.”
Because Mary’s evidence showed that Michael had benefited from her increased earnings for 20 months before they split up, Calabria concluded that her loans qualified as marital debt.
Her attorney, Wesley Starnes of Hickory, did not respond to an interview request.
Michael’s attorney, William Respess Jr. of Lenoir, had argued on appeal that even if the court put his client on the hook for Mary’s loans he should only have to pay for the period in which he benefited from the debt.
“This marriage benefited from her increased earnings for 20 months, but this is a 30-year loan,” Respess said in an interview.
He also asserted that Mary’s loans could not be considered marital debt because a degree is classified as separate property.
But Calabria found that Respess failed to raise both of those arguments at the trial level and declined to consider them on appeal. Though Respess took issue with the appellate court’s findings, he said he would not advise Michael to petition the state Supreme Court to hear the case.
Days before the opinion was published, Respess was suspended from practicing law for two years for having sex with two clients, one of whom he married. He said the disciplinary action was not related to the Warren case.
‘Subtle and loose standard’
Calabria acknowledged in Warren that the state’s appellate courts “have not defined what constitutes a joint benefit in the context of marital debt” and have not required evidence to show such a benefit.
“Instead,” she wrote, “our Courts have required that the debt must have been incurred for the joint benefit of the parties.”
That is a lower standard than proving that both parties actually benefited from the debt. Most people take out student loans with the expectation that they’ll get better jobs and make more money after graduation, but that doesn’t always happen.
Still, Rosen expects that the courts will treat virtually all student loan debt incurred during a marriage as a marital debt, regardless of whether both spouses benefited, “unless there’s really an egregious set of circumstances,” he said.
For instance, he knows of cases in which the court refused to make one spouse pay for her partner’s credit card debt for escort services. But otherwise, “there’s almost a presumption that all debt incurred during the marriage is for the benefit of the marriage,” he said.
Rosen added that the courts might also side with people who were married to medical students and left behind shortly after their spouses graduated from a residency program and became full-fledged doctors with substantially larger salaries. This happens often, he said.
He believed that the non-doctor spouses would have a strong argument against classifying the medical school loans as marital debt because the relationship ended before they realized any substantial benefit from the debt.
“The court is giving itself a little wiggle room here. I think it really is a subtle and loose standard,” he said. “The question in the next case and the case after that and the case after that is going to be whether there is marital debt when there is increasingly less benefit.”
Follow Phillip Bantz on Twitter @NCLWBantzt