Bankruptcy and Divorce

Submitted by on Tuesday, August 20, 2013, 4:33 pm

Financial and emotional turmoil often go hand in hand. Sometimes it is hard to determine which came first. That combination of troubles creates the opportunity for many missteps. Is it best to file bankruptcy before filing a divorce? Does the divorce decree affect who the creditors can sue? Does a bankruptcy filing affect which assets (things) can be protected from creditors? Does it matter which Chapter of bankruptcy is filed?

These are only a few of the issues to sort out before taking any steps that may keep you from reaching your goals. The answers dependent on your unique circumstances, but some general concepts apply to all.

Both divorce and bankruptcy laws divide assets and determine who pays which debts. Unfortunately, divorce laws do not have any impact on what creditors can do. A divorce proceeding only affects the rights of the spouses. The creditors are not a party to the divorce proceedings and cannot be heard by the court so they are not bound to only go after the spouse identified as liable in the divorce decree.

When spouses can get along and work with each other it is often best to complete a joint bankruptcy before finalizing a divorce. By completing the bankruptcy first each spouse knows what debts and assets remain to be allocated in the divorce. If the divorce is completed first, one or both spouses can file bankruptcy and discharge (eliminate) his or her legal responsibility to pay debts. In addition, the first spouse to file bankruptcy gets to determine where the available exemptions (protections from creditors) are applied to the assets. The bankruptcy second option can upset the hard fought provisions of the divorce decree.

To attempt to limit the potential for damage if one spouse files bankruptcy after a divorce decree is entered many decrees contain a “hold harmless” provision. It basically requires each spouse to hold the other harmless from his or her failure to pay those debts given to him or her in the decree. That sounds great, but if the spouse files a Chapter 13 bankruptcy, he or she can overcome the provision in the decree and has no responsibility to hold the non-filing spouse harmless.

We provide free consults to sort through your unique facts and help determine what your decision will do for or to you.