Divorce and Bankruptcy
November 3, 2022
About half of all marriages end in Divorce. The question is whether the couple should file a joint bankruptcy before or during the Divorce proceeding. There is no doubt that emotions run high and parties frequently have animosity towards each other. But if the couple can put aside their differences, bankruptcy can make things less painful.
First of all, married couples can file a joint bankruptcy even if they live separate and apart. Married couples can file a bankruptcy any time before a final judgment of divorce is entered.
The analysis should be: Is there too much debt? And, will the debts survive a Divorce?
Divorce judgments frequently allocate assets and the responsibility of marital debts. Most often one party will assume all of the debts but, of course, the debts can be divided. The most frequent debts of this type are the home mortgage or a car loan, but it could also be a joint credit card bill. The problem is what happens when the spouse given the responsibility no longer has the ability to pay.
CREDITORS ARE NOT BOUND BY THE DIVORCE JUDGMENT
Here is a frequent mistake. Even though the divorce decree says one spouse is responsible for paying a debt, the decree does not bind the creditor. What do you do when you or your ex-spouse can’t make the payments? Creditors can pursue either or both of the parties including filing law suits, damaging credit reports, and obtaining judgments, garnishments, levies, and attachments.
The aggrieved ex-spouse can, of course, file motions in the Divorce court usually seeking Contempt of Court. This might work or it might not. The offending party may not have the resources at that time to make payments. The judge can order payment but the Court itself does not make the payments. You can still be stuck getting taken to court by the creditor or getting your credit ruined when you are not supposed to be responsible for the debt.
CH. 7 BANKRUPTCY AFTER DIVORCE BY THE RESPONSIBLE PARTY
Assume the ex-spouse who is supposed to make the payments then files a Chapter 7. The debts owed to the creditor are discharged. But the Bankruptcy Code makes clear that debts and obligations owed to the other party in a Divorce Judgment are not discharged. For example, a debt to Big Bank of Main Street is discharged but the Debtor still owes the amounts to his/her ex-spouse. If both spouses file the Chapter 7 together, there is no remaining obligation to Big Bank, and both spouses can get a fresh start free from the risk that the ex-spouse won’t be able to make all the payments.
CH.13 BANKRUPTCY AFTER DIVORCE BY THE RESPONSIBLE PARTY
While child support and alimony (maintenance) will not be discharged in a Chapter 13, Property Settlement agreements such as the requirement to pay pre-marital debts are dischargeable in a Chapter 13. Notwithstanding the Divorce Judgment you could still be stuck on the mutual pre-Divorce debts.
If you are contemplating a divorce or are in a Divorce proceeding and there are sizable debts, it makes sense to discuss bankruptcy options with a lawyer experienced in Consumer Bankruptcy law. Even if there are other issues in the Divorce, filing a Bankruptcy will likely eliminate the big issue.
Our law firm has helped many divorcing couples file Bankruptcy whether it is a Chapter 7 or a Chapter 13. Our consultation is Complimentary and confidential Divorce lawyers often refer such cases to us to avoid possible Conflicts of Interest.