In the current economy, couples who are considering a divorce need to be as concerned about how their debts will be divided as they are about their assets. In a divorce in a community property state like California, any debts of the marital estate will be divided equitably. This includes debts that are only in one spouse's name, but were incurred during the time of the marriage. Thus, spouses may be liable not only for debt held jointly in both of their names, like a mortgage, but for debt held only in one spouse's name, like a car loan.
Bankruptcy May Be The Best Choice
For divorcing couples with heavy debt loads, bankruptcy may be the best answer to relieving at least some financial stresses. Bankruptcy can be filed before, during or after a divorce. Spouses may file the bankruptcy jointly or separately.
Generally, it may be in the spouses' best interests to file a joint bankruptcy on their marital debts before filing for a divorce. This way, they may be able to eliminate some debts that otherwise would be subject to division during the property settlement portion of the divorce. For example, if the couple has a lot of consumer debt like credit cards, they may be able to discharge that debt in a Chapter 7 filing. Conversely, if the couple is facing foreclosure on their family home, they may be able to restructure their mortgage and other debts with a Chapter 13 filing. Using a joint bankruptcy to decrease the debt load can make the divorce process less contentious.
However, not all couples seeking a divorce will be capable of working together and reaching an agreement to file for bankruptcy first. In this case, either spouse may file separately at any time. A separate filing can make the divorce process trickier, especially if one spouse waits until after the divorce has been filed to seek bankruptcy protection. In these cases, the family court will have to wait until the bankruptcy court has issued its decision before it can finish the property settlement portion of the divorce.
Protecting Yourself from an Ex-Spouse's Bankruptcy Filing
Unfortunately, some spouses and ex-spouses will attempt to use bankruptcy as a means of revenge against their former partners. For example, if in the property settlement the family court required a husband to pay the $5000 owed on the couple's joint credit card account, he may seek to file a Chapter 7 bankruptcy to avoid paying this amount.
Under the bankruptcy code though, debts that are incurred in the course of a divorce or separation or in connection with a separation agreement cannot be discharged in bankruptcy. Accordingly, the credit card company could continue to seek payment from the husband who is under obligation to pay the debts.
As a practical matter though, the company will likely seek payment from the wife. Even though she was not required to pay the debt in the divorce settlement, the wife is still a joint-owner on the credit card account and liable for the debt. If she does not pay, the credit card company could take legal action against her and destroy her credit rating.
To protect against such an outcome, both spouses should ensure that the property settlement is carefully constructed. For example, the property settlement could include a clause giving either spouse the right to re-open the property settlement if the other spouse files for bankruptcy after the divorce is finalized.
A spouse also could include clauses in the property settlement that allowed him or her to take a lien on property owned by the other spouse in exchange for their promise to pay their share of the marital debt. Additionally, a spouse could insert an indemnity clause into the agreement. These clauses allow one spouse to seek repayment (i.e. indemnity) from the other spouse for any debt the spouse was required but failed to repay under the property settlement.
Also, it is important to note that spouses cannot discharge certain types of debt during a bankruptcy, including support awards. This includes both alimony and child support.
Given the complexity bankruptcy adds to any divorce, it is necessary to have an experienced attorney guide you through the process. The lawyer can explain the advantage and disadvantages of filing for bankruptcy, when it should be done and whether you should file jointly or separately. For more information, contact a divorce attorney knowledgeable in bankruptcy law.