Bankruptcy and Divorce: Who's Debt is It?

If you are considering bankruptcy, know that your past divorce may be affected. This is especially true if the divorce is just a few years old. If you are still in a divorce then check out Part 1 of my article.

First off, if you already divided property in divorce, then you have a strong argument to have the Federal Court honor the division. There is no guarantee but Court will read a divorce order before making a decision.

What Problems Could There Be?

The main problem is who owes the money. It is common in a divorce that you take debts that are only in your ex-spouse’s name, like a credit card. If you file for bankruptcy, that debt may not be discharged because it is not tied to your social security number. So even after the bankruptcy, the debt remains and your ex-spouse has a court order stating that you will pay it which is still enforceable.

There is a problem if you still have debts or assets in both names. For example, if you both own the house or car because you never got around to transferring it, then the US Trustee may take it. That means your bankruptcy may force a premature sale of property at rock bottom prices.

If debt is in your name but your ex-spouse was supposed to pay, then you may end up discharging it without any benefit to you. For example, your ex might have agreed to pay off credit cards in your name per divorce agreement. The Bankruptcy should wipe out the debt in your name so your ex gets the benefit. If you traded that debt for something else, then you may have gotten the short end of the stick.

Finally, if you owe back support, that stays even after a bankruptcy.

Is There Any Solution?

Once the divorce is done, there is little that can be done without your ex-spouse’s cooperation or going back to court. However, a little bit of planning goes a long way. For example, finalizing a divorce is a great step. Transfer all debts and assets into the proper names. If one spouse took the house, then the other spouse should be removed from both the title and mortgage. If one spouse is assuming debt, move it into their names only and close all joint credit cards. Finally, any money should be divided into separate accounts and all joint accounts closed.

If you didn’t do the above and you had to file soon, then let your ex-spouse know because she will drag you back to court if the car is repossessed while she is at the mall.