Bankruptcy and Divorce

fig 11 05 2018 06 00 53 - Bankruptcy and Divorce

There are several issues to consider when contemplating a bankruptcy filing as part of a divorce. . Certain debts are dischargeable and others are not.  The following divorce related debts are not dischargeable in a bankruptcy filing:

  • Taxes (federal, state, real estate, etc)
  • Child support
  • Alimony (aka Spousal Support or Maintenance)

Debts arising from a marital settlement agreement or divorce decree are dischargeable unless the creditor (ex-spouse) objects to the bankruptcy proceeding.  This is why you want to have it spelled out in writing as to what happens in the event of a bankruptcy filing where all of the property settlement transactions have not yet taken place.

The following example illustrates another issue which could arise if you have split joint debt and your ex-spouse proceeds with filing bankruptcy.

Joint Debt Example

Let’s assume that you have 2 joint credit cards with a balance of $10,000 on each for a total of $20,000.  Through your settlement agreement, you decide to split the joint debt evenly and each of you agree to pay off the 1 one of the credit cards (which we wouldn’t recommend). One year after the divorce, your ex-spouse decides to file bankruptcy and hasn’t paid any of the debt of associated with the credit card.  Your ex-spouse will be relieved of half of the joint debt ($5,000) and you will be responsible for the other half even though you had split the joint debt in your settlement agreement. You are now on the hook for $15,000 of the credit card debt instead of the original $10,000.

Strategy

If you have concerns that your ex-spouse may be filing for bankruptcy, you will want to structure your property settlement in a lump-sum agreement if possible.  Also, if payments are to be made over a period of time, you may want to have those payments classified as child support or alimony.  This can help in protecting you from losing the income in the bankruptcy.  Additionally, any joint debt should be split into separate debt where feasible.  What this means is, if you have joint credit cards, open individual accounts in your name and transfer the debts from the joint credit cards to the individual credit lines and then close the joint credit card accounts.  Download our eBook for more information on managing credit, structuring the divorce properly, and other financial matters related to divorce.