Divorce and Bankruptcy

Deciding you need to separate from a spouse is an incredibly emotional and painful decision.  Once made, it is important to understand your legal rights and obligations regarding the debts which will remain after the divorce decree has been finalized.  As an Asheville bankruptcy attorney, I frequently spend time with clients who benefit from a bankruptcy case in conjunction with their separation.  Some financial ties to former spouses cannot be broken in divorce proceedings.  Here are three fundamentals to understand about how divorce and bankruptcy relate to one another.

Who is obligated on the loan agreement for the debt?  Generally speaking, only the party who is obligated in the loan agreement is liable for the debt.  If Mr. Husband’s name is on the credit card agreement, and Mrs. Wife is only an authorized user, Mr. Husband is the only party whose credit will be damaged (or who might be sued) for failure to pay the creditor.  This changes, however, if Mrs. Wife agrees to be responsible for the debt as a part of a settlement agreement during divorce proceedings.  In that case, if Mrs. Wife fails to pay as outlined in her agreement, Mr. Husband can recoup his damages from her.  A common solution to this issue is for both Mr. Husband and Mrs. Wife to file a bankruptcy case.  Once both parties are discharged from the debt, neither party needs to worry about paying it any longer.  Careful planning before a separation agreement can make the separation negotiation more simple.   In essence, there is no need to negotiate who is going to pay marital debts when they can be extinguished by a Chapter 7 discharge for both parties.  It is wise to seek bankruptcy advice as quickly as possible after you decide to go your separate ways. 

If your ex-spouse takes responsibility for the debt, are you still responsible for it?  Yes.  Even if your ex-spouse takes responsibility for a debt in a separation agreement, you are still obligated to the bank or credit card company to whom the debt is owed until your ex-spouse pays it off.  Frequently, ex-spouses are unable to uphold their part of the divorce bargain.  A properly filed Chapter 7 case can eliminate the obligation entirely through a bankruptcy discharge and is often a better solution then trying to chase down an ex-spouse for payment.

Can bankruptcy discharge your debts to an ex-spouse?  Generally, no.  The bankruptcy court was not designed to settle financial disputes between ex-spouses.  However, a successful Chapter 13 bankruptcy case can discharge marital debts if they were in the nature of ‘property settlement’ rather than ‘support.’  A Chapter 7 bankruptcy case does not discharge any type of domestic support obligation, but instead can be used as outlined above to discharge both husband and wife’s obligations.

After wading through the emotions of separation, many people benefit greatly from filing a bankruptcy case which severs financial ties to a former spouse.  The bankruptcy court’s ‘fresh start’ is a tool which can be utilized to propel a separating spouse forward in their recovery.  If you are ready to figure out your options, I would be pleased to speak with you during a free, initial bankruptcy consultation.

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