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Bankruptcy and Divorce: What You Need to Know

Posted on 11/30/16 8:13 AM

bankruptcy-and-divorce.jpgPeople file for bankruptcy for many different reasons. Those reasons are often more complex than just being unable to make ends meet.  Usually, there is another life event that is putting stress on household finances.

Many times, financial trouble and the need for bankruptcy relief are brought on by a failing marital relationship. Or, it may be the other way around – financial issues may have led to the breakdown of the relationship.

Bankruptcy cases that involve a pending or recent divorce need to be analyzed closely by a bankruptcy attorney.  You should be aware of the potential issues a divorce can have on your bankruptcy case or, vice versa, that the bankruptcy could have on your divorce case.  While I cannot possibly cover every issue between divorce and bankruptcy in a short article, I will describe a few common issues I often encounter in my office below. 

Bankruptcy or Divorce: Which Should I Do First? 

Probably the most common question I get from a potential client that is considering divorce and bankruptcy is, “Which should I do first?”  Unfortunately, most of the time, the answer to this question is, “It depends.” 

In order to determine whether divorce or bankruptcy should come first, you should meet with a qualified attorney. Talk with your bankruptcy attorney about how you plan on dissolving the marriage.  Is the divorce going to be uncontested (or agreed upon)? Or are there issues that will be contested (or require litigation)? Of course, things may come up in the divorce proceeding that may change this plan, but you should still have this conversation with your bankruptcy attorney.

If you are pretty confident that your spouse will not agree to how to divide assets and debts, and it looks as if litigation cannot be avoided, the first thing you should do is hire a competent divorce attorney as soon as possible. In my opinion, having counsel in both the bankruptcy and divorce is paramount to the success in both cases, especially when the divorce is going to be contested. You need to be getting sound advice on both cases and having attorneys that can communicate with one another can be very beneficial for you. 

How Will Assets and Debts Be Divided?

Another issue you need to consider when going through a divorce is “How will we divide our assets (and debts)?”  A divorce determines how marital assets such as real property and personal property will be divided. A final decree of divorce will also dictate what debts each spouse will pay.  If spouses owe a joint debt (for example, a car loan or a credit card you may have together), the divorce decree should state which spouse is responsible for paying that debt.  It is important to note: if a spouse is ordered to pay a debt pursuant to a final decree of divorce, that obligation becomes a debt he or she cannot discharge in a subsequent bankruptcy filing. 

11 U.S.C. Section 523(a)(15) is the section of the Bankruptcy Code that sets forth this exception to discharge of a debt owed to a spouse or former spouse incurred in the course of a divorce. This exception from discharge is only enforceable by the spouse. The creditor to whom the debt is owed still cannot collect from the bankrupt spouse.  However, here’s a very common scenario: Let’s say you are assigned to pay a joint credit card debt per your divorce decree and hold your former spouse harmless. You then file bankruptcy. The credit card creditor then attempts to collect from your spouse on that joint debt that you were decreed to pay as part of your divorce. To the extent that your ex-spouse incurs actual damages from the collection (i.e. garnished wages), he or she would have the right to file an action in the court where the divorce was finalized seeking those damages, court costs, and attorney fees from you. 

When a client tells me they have recently divorced, I always ask to see a copy of the final decree of divorce to see if the potential client assumed any debts pursuant to the divorce.  If they did, then this provision of the Bankruptcy Code would apply and the client often needs to keep paying that particular debt in full to avoid a potential action by their former spouse.

Filing for Bankruptcy as Single or Joint

Another common scenario I see related to divorce and bankruptcy is when a potential client and his/her spouse are not yet divorced but likely will be divorcing soon. The question I get in this situation is: “Should we file bankruptcy together or separately?” Though it varies case by case, it is sometimes advisable for a married couple to go ahead and file a joint bankruptcy before they go through with the divorce. One reason to go ahead and file is that it usually will save you money related to court costs and attorney fees. A joint bankruptcy case typically costs the same as an individual case. Filing together can also take away the issue of the exception from discharge described above if the parties owe joint debts; if you both discharge your liability in bankruptcy then there is no party left for the creditor to collect from, rendering the assumption of that debt moot for divorce purposes. Often filing for bankruptcy together before a divorce, can pave the way for a much smoother and less costly divorce proceeding.

There are many other ways in which divorce and bankruptcy interact and I come across unique scenarios all the time. If you’re considering bankruptcy, be sure you mention to your attorney if you have recently divorced or may be divorcing soon so that the attorney can go through the potential impact of that divorce on your bankruptcy and the potential impact of the bankruptcy on the divorce. Going through a divorce is stressful, but the process can be made less stressful with the right financial advice.

About Bryan Penland

Bryan Penland is the managing attorney with Flexer Law in the Columbia, Tennessee, office.  He focuses his practice around consumer bankruptcy, and also has extensive experience with handling divorce cases.  Bryan played baseball in college and now enjoys coaching his son’s travel baseball team. 

About Flexer Law

Flexer Law is a full service law firm in Middle Tennessee specializing in consumer bankruptcy (Chapter 7 and Chapter 13).  More information can be found at: http://flexerlaw.com or by calling 615-255-2893. 

Helping Families & Bankrupcty Attorneys since 2005, Contact us

Tags: Bankruptcy and Divorce

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