It’s fairly common for spouses who have recently been through divorce to encounter financial problems. Sometimes, a former spouse will file bankruptcy as a result.
This often makes the other spouse very nervous. What if the bankrupt spouse is supposed to pay alimony, or child support? Will that continue? What if the bankrupt spouse still owes money to the other spouse as a result of the divorce agreement? What if the bankrupt spouse had been ordered to pay off a joint debt?
If your ex-spouse has filed bankruptcy, or is thinking of doing so, it’s wise to speak to your family law attorney right away. There are some general rules governing what will happen, but only an attorney can tell you exactly how they apply to your specific situation.
As a general rule, any debt a spouse has incurred as a result of a divorce cannot be avoided in bankruptcy. So for instance, if a spouse has been ordered to pay alimony or child support, they have to continue to do so even if they go bankrupt.
What if a spouse owes money to the other spouse as a result of a property settlement? Generally, the spouse can’t avoid this debt either.
This was not always the case. Before 1994, spouses who went bankrupt could avoid, or “discharge,” a property settlement. Congress then changed the law, but it still said that a spouse could avoid a property settlement if the benefit to the bankrupt spouse outweighed the harm to the other spouse. It was only in 2005 that Congress made a clear rule that property settlement debts couldn’t be avoided.
Since 2005, the courts have been very strict about not letting spouses get out of their divorce obligations through bankruptcy. For instance, in one recent case, a wife loaned her husband $24,000 before the marriage to help his business, and another $20,000 during the marriage. When they divorced, a judge ordered the man to repay the $44,000. He then went bankrupt. He claimed that he should only have to repay $20,000, because the other loan happened before the couple got married.
But a federal appeals court in New Orleans said the man had to repay the entire amount. Even though the loan was made before the wedding, a divorce judge had ordered him to repay it as part of the divorce, and that made it a “divorce” debt.
Another issue is what happens if a divorce agreement requires one spouse to pay off a joint debt, such as a mortgage or a credit card. If that spouse goes bankrupt, can he or she avoid this obligation to a third party?
Typically, no. As long as the divorce papers require the spouse to assume the debt, the spouse can’t get out of it with a trip to bankruptcy court.
For instance, a Missouri couple divorced recently and the husband was ordered to pay off $18,000 on a line of credit from U.S. Bank. Several months later, he filed for bankruptcy.
The Missouri Court of Appeals said the husband still had to pay off the debt to the bank. Even though the debt wasn’t owed to his wife, it was owed for her benefit, and that made it a divorce-related debt.
Other courts have required bankrupt spouses to pay off debts owed to other third parties – including credit cards, mortgages, homeowner’s association dues, income taxes, car loans, and medical bills.
But while the law favors ex-spouses, it’s still important to speak to an attorney, because you may need to take steps to protect yourself in the legal proceedings, especially if the bankrupt spouse stops paying a debt.
It’s also possible that even though an ex-spouse can’t legally avoid a debt through bankruptcy, the ex-spouse might stop paying anyway because he or she is truly broke and simply can’t pay it off. If the debt is owed to a third party, in some cases the third party might be able to come after you for repayment – especially if it’s a debt for which you co-signed during the marriage. While the divorce might have “assigned” the debt to the other spouse, typically the bank or other third party won’t have been part of the divorce and won’t have waived its rights.
In such a case, you’ll want to speak to an attorney about what legal mechanisms could be available to protect you.