Marital Debt and Bankruptcy

 Posted on June 20, 2017 in Asset Division

If you or your spouse ends up in the unenviable position of having to file for both bankruptcy and divorce, it is imperative that you both understand the laws surrounding marital debts and bankruptcy. Many couples make assumptions and then react strongly when their carefully constructed asset division proposal collapses on itself. By educating yourself, you and your spouse can work to avoid such a fate.

Bankruptcy First?

One of the biggest questions regarding asset division, but especially marital debt, is whether to file for bankruptcy before divorce or vice versa. The general rule is that it depends on each spouse’s individual finances, and which type of bankruptcy would be filed. However, in most cases, filing beforehand tends to streamline the divorce process, while filing afterward or concurrently can cause a divorce to drag on. This is especially true if you or your spouse would be filing a Chapter 7 bankruptcy, either jointly or individually. In a Chapter 7, all debts are eliminated or written off, as opposed to in other types of bankruptcy where restructuring is more common.

If one files for Chapter 7 bankruptcy before divorce, a significant amount of debt will likely be off the table, which means it does not have to be taken into account during property division in the divorce. This can cut down on time spent, and correspondingly, on attorney fees. However, some do choose to file for divorce first, either out of a misguided belief that they can then get out of paying spousal support, or because they want to safeguard a specific asset. This can have decidedly mixed outcomes.

Beware of Creditors

Perhaps the most egregious mistake that many couples make is believing that their divorce decree is binding on every actor that may have business with their marriage. The divorce decree does not bind your creditors. If your spouse is assigned responsibility for a debt, but defaults or files for bankruptcy (Chapter 7 or 13), that creditor may attempt to collect from you, regardless of whether or not your divorce decree absolved you of the responsibility to pay. Bankruptcy law requires that once a debtor has filed for bankruptcy, all creditors must cease all communication with that person. It says nothing about ceasing communication with a spouse or other co-signer.

Be advised, however, that barring certain very rare exceptions, bankruptcy law does not allow you to shake some creditors, if you are in the position to be on the proverbial hook: your spouse and/or children. 11 USC § 523 states specifically that spousal maintenance and child support are explicitly not dischargeable in bankruptcy unless it is absolutely impossible for the debtor to both pay and support themselves in a semi-decent style, and this is extremely difficult to prove. While bankruptcy will wipe out some of your marital debt, it will not clear the slate completely.

Need Help Understanding Bankruptcy & Divorce?

If you have been unfortunate enough to have to confront both bankruptcy and divorce at the same time, you need a knowledgeable attorney who will fight for you. Our passionate DuPage County divorce attorneys can help advise you as to the best path for you, your family and your finances. Contact our offices today to set up a free initial consultation.

Source:

http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics