Divorce and Bankruptcy, Dealing with Large Marital Debt

Many people are divorced every year. Often, divorce is the direct or indirect result of financial problems that eat away at a couple’s relationship. The escalation of marital debt increases pressure placed upon one or both partners. Ultimately, this burgeoning debt level can cause the couple to seek a divorce, bankruptcy, or both.

Unfortunately, while excessive debt may cause the end of a marriage, the debts accumulated by the couple continue to require payment to creditors. These debts can survive long after the marital union is dissolved. When the couple divorces, creditors or debt collection agencies go after one or both individuals. Because creditors may use any of a number of legal remedies to collect a debt, the divorced person or persons may experience the dark side of credit. Wage garnishments, liens, foreclosures, or repossessions can happen. This is a topic that is best discussed with your Family or Bankruptcy Attorney to understand more details before a separation agreement is in place.

For many people, it seems that divorce is just the beginning of continued financial harassment and worry. That’s why both parties should fully address debt issues during the divorce process. If the former couple can’t resolve their financial issues, engagement of a qualified bankruptcy law firm is the next important step.

Importantly, divorce attorneys must divide the separating couple assets, if any, with an eye towards future bankruptcy. Division of marital debts and assets should properly offset each other in bankruptcy liquidation. However, financial support awarded by the court to either spouse–including child support, alimony, or other maintenance–are not discharged in bankruptcy court. Liquidation of any assets in bankruptcy can further financially disadvantage the divorced person’s ability to pay court-mandated support.

The Chicken or Egg Quandry

Divorce can seem like the best solution for a financially overburdened couple but, as above, this is a complex issue when ongoing support matters must be considered.

Both partners in the divorce may know that bankruptcy is likely. The spouse asking for alimony and child support may want the financially burdened spouse to provide higher payments so that he or she can side-step the bankruptcy issue. The spouse who must pay future support may want to conserve cash by giving a higher percentage of any property. He or she may agree to hold his or her spouse harmless for the remaining debt accumulated during the marriage. However, this conclusive step might not be the right one to take.

A proper risk assessment of each individual’s balance sheet should be performed by an experienced bankruptcy attorney before making this sort of conclusive decision.

The divorcing couple’s financial condition can rapidly proceed from bad to worse after the divorce is final. Two types of debts may be challenged after the property is divided and/or the support issues are determined by the court in Chapter 7 bankruptcy.

The spouse required to pay support may argue for its discharge in bankruptcy court. He or she may also argue about the dischargeable nature of assets and debts accumulated during the marriage as a result of his or her bankruptcy petition.

Chapter 7 is crafted to provide those in debt with a fresh financial start by removing the onus of unmanageable, burdensome debt levels. (11 USD Section 701 et seq) Debtors, such as divorced persons suffering from high debt loads, may be discharged from credit cards, medical fees, automobile, or mortgage loans. After bankruptcy, the individual is not required to repay debts. Creditors can no longer enforce their claims against the items discharged in bankruptcy court.

Bankruptcy does not provide carte blanche discharge of all debts. Code Section 523 says that some debt items may be discharged and that the individual owing them must continue to pay.

In this sort of scenario, the divorced spouse may choose to attack the discharge of some debts by the former partner. Bankruptcy law allows for a short window of opportunity for this sort of objection.

However, an attack on discharge ability of certain debts must be made by filing an adversary proceeding in the US Bankruptcy Court within the narrow time constraints (e.g., sixty days following the first meeting of creditors).

Divorce and bankruptcy, ad dealing with large marital debt, is a complex issue. Engage a qualified, experienced law firm before attempting to tackle these issues alone.