Divorce Debt And Bankruptcy
Since 1967 there have been several studies that rank stress due to a traumatic life event. The studies agree that divorce causes tremendous stress in a person’s life, and is number two in the rankings for most studies, behind death of a spouse or child.
Since divorce is such a stressful time, it is no wonder that people make mistakes with their finances during a divorce. Many couples either overlook or ignore the economic realities of their changed financial condition. In some cases financial mistakes made during the divorce can lead to bankruruptcy. In other situations bankruptcy is simply inevitable.
One financial mistake divorced couples commonly make is a misunderstanding of the family court’s “assignment” of a joint debt to one of the spouses. The family court has the authority to order one spouse to pay a particular joint debt. For instance, husband pays the MasterCard; wife pays the car payment and keeps the car. The court order may contain a “hold harmless” provision that means that if the obligated spouse does not pay the debt, and the other spouse is harmed, the obligated spouse is responsible to repair the harm (usually this means money damages). This order is enforceable through the court’s contempt power.
Many people mistake this assignment as an alteration of the contract with the creditor. The family court’s order does not change the couple’s joint obligation on the debt because the creditor was not a party to the couple’s divorce case. A joint debt remains legally enforceable against both or either party even after the divorce. If the obligated spouse does not pay pursuant to the family court’s order or the terms of the contract, the only recourse is to cry foul to the family court judge. The creditor can pursue any legal action to collect on the debt including reporting the delinquent account to the credit bureaus, filing a lawsuit against both spouses, and repossession or foreclosure as authorized by law.
Many couples can benefit from filing bankruptcy before a divorce is final. In most circumstances property that is owed by a husband and wife receives better protection from creditors than it receives if owned by a single person. Some debts that are ordered by a family court cannot be discharged by the bankruptcy court, so it is better to discharge those debts prior to a family court order. In some cases, if one spouse files bankruptcy and discharges a debt, a family court cannot reassign that debt to the discharged debtor.
Divorce can complicate the legal obligations of a divorcing couple’s finances. If you and your spouse are considering divorce and have significant debt, speak with an experienced bankruptcy attorney and discuss your options before finalizing your divorce.