What happens if my spouse files for bankruptcy after our divorce?
Due to the current state of the economy, it seems that many clients are becoming increasingly concerned as to what happens if their soon-to-be ex-spouse files for bankruptcy after the divorce.
They often ask, "What will happened to child support?" or "Who will have to pay the credit card bill if he/she files bankruptcy?" These seemingly simple questions often center on more complex and underlying issues.
It is crucial to understand that the bankruptcy code is federal, not state law. This means that the bankruptcy court is not necessarily bound by language in the divorce decree entered by the state court where the divorce occurred. Ultimately the bankruptcy court will decide whether a debt or obligation in the marital settlement agreement/divorce decree is dischargeable or nondischargeable. In other words, the bankruptcy court will decide whether the ex-spouse (a/k/a "the debtor") will have to pay the debt (this debt would be "nondischargable") or whether the debtor will not be personally liable (this debt would be "dischargeable"). The obvious fear clients have is whether or not they will be stuck holding the bag to deal with third-party creditors despite language in the divorce decree/judgment that the ex-spouse is also required to make payment. There are certain debts/obligations, such as child support, that according to the bankruptcy code are nondischargable - meaning the debtor cannot escape personable liability despite filing for bankruptcy. Unfortunately, most other debts commonly allocated in the divorce decree can be dischargeable, including debts to third-party creditors.
For example - Bill and Susan have a joint credit card with Credit Card Company A. The outstanding balance of that card is $10k. Bill is ordered in the divorce decree to pay $8k and Susan is ordered to pay the remaining $2k to the credit card company. Bill files for bankruptcy and the bankruptcy court determines that the debt to the credit card company is dischargeable. The result: it is possible that Susan could then be liable for the entire $10k to Credit Card Company A; or the bankruptcy court may require Bill pay the $8k to Susan instead of to Credit Card Company A. The results will vary depending on the facts and circumstances of each individual case.
There are safety measures that can be implemented during the underlying divorce to better protect a party from the possibility that their ex-spouses' obligations will be discharged in bankruptcy. The attorneys at Hall, Rustom & Fritz have experience in these and other similar divorce matters to ensure that their clients are protected as best as possible both during and after their divorce.