Bankruptcy in Divorce

Filing bankruptcy in divorce is not an uncommon occurrence. Some couples think that divorce and filing bankruptcy will solve all their money problems, allowing each person to move on to a bright future. This is frequently the result of each party blaming the other for all the financial problems.

In truth, divorce combined with bankruptcy may help by discharging some or all of the debts but unless future spending by each of the divorced people who filed for bankruptcy either just before or during their divorce will end up in new financial problems very quickly unless budgeting and financial management principles are applied by each of the newly-divorced people. Also, bankruptcy will not discharge or reduce court-required divorce-related payments such as child support or alimony.

Legal Counsel When Filing Bankruptcy in Divorce

If you find yourself filing bankruptcy during divorce, you should seek the aid of an experienced attorney who has handled cases involving this combination of court cases. Completing bankruptcy prior to the eminent divorce can result in reduction or discharge of all debt and make it much easier to deal with asset division. It is also much better than to learn later that your ex-spouse filed bankruptcy after the divorce was final.

A 'hold harmless' or indemnity clause can be written into the divorce decree stating that the other spouse is responsible for specific debts and requiring the debtor spouse to repay you should you be forced to pay one of the specified debts. While these clauses are no guarantee that you'll be repaid for certain, it does provide the bankruptcy judge a reason to consider how the debt is discharged.

Is Filing Bankruptcy Beneficial or Harmful?

When amid divorce proceedings, should one spouse file for divorce, the court's efforts to determine property division will come to an abrupt halt in another form of automatic stay. It is very likely that your legal counsel handling your divorce will recommend that you also file for bankruptcy. Unfortunately, if you choose not to enter into a bankruptcy petition, all the parties who extended credit to either you or your spouse will attempt to collect their money from you because the property and debts have not yet been divided by the court.

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Debt Liability When Filing Bankruptcy in Divorce

Once the divorce court has determined a division of assets and debuts, each party owns the asset or the debt in question. It is not always true that the assets and the debt for that asset necessarily go to the same spouse. In cases where one spouse earns a huge salary while the other spouse has only a meager income, the court might award ownership of the marital home to the party with meager income while assigning the debt for the home to the other spouse.

When filing bankruptcy in divorce, if the asset / debt division has been completed and the divorce has been made final, a bankruptcy filed by only one of the newly divorced parties will include only the debt for which that party is liable.

There are some situations where the divorce court will establish that one spouse will reimburse the other for specific debts collected from the other spouse. When filing bankruptcy in divorce or immediately after divorce, this reimbursement is considered a debt and may be discharged in the bankruptcy.

Bankruptcy Abuse Prevention and Consumer Protection Act and Divorce

Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the bankruptcy reform legislation of 2005, contains some sections to consider when filing bankruptcy in divorce. A positive aspect is that BAPCPA does not permit bankruptcy on the part of the other spouse to discharge their court-ordered requirement to pay child support or alimony. The spouse filing bankruptcy will not receive final discharge of their case until the court can confirm that all obligations of a domestic nature are current.