Bankruptcy is a vital concern in the divorce picture. If you think a bankruptcy will not impact your lifestyle, consider this: If your spouse does not meet the burden of paying off a joint debt under the terms of your property agreement, you may be looking at your own bankruptcy unless you can come up with the funds. Yikes!
Particularly in community property states, the bond between spouses can linger for years after a divorce. Both ex-spouses can be held responsible for debt incurred during the marriage. If one ex files a petition for bankruptcy and discharges the joint credit cards, the credit card companies can come after the other. This could shift the debt from the one filing for bankruptcy protection to the ex who is not (at least not yet). Recent amendments to the bankruptcy code (which changes after October 16, 2005) have attempted to tighten up the rules about property distribution and debt collection. Anyone contemplating a divorce from a spouse who is considering bankruptcy, or has filed bankruptcy in the past, should consult an attorney specializing in bankruptcy laws.
Filing bankruptcy after you divorce may cancel out the debt responsibility identified by specific terms in your property settlement. Example: Let's say ex-spouse A and B divorce. The settlement or divorce decree states B is to receive a property settlement, as well as child support and alimony. Within a particular amount of time, A files bankruptcy. B will receive notice about the bankruptcy and will need to file a petition to preserve B's claim to continue B's support payment and the property settlement A owes to B. With support obligations, B may not need to file anything and A will still be responsible for the debt (this is called non-dischargeable). In other words, bankruptcy will not protect A from A's obligations to B. However, A's back child support or spousal support obligations will be stayed (stopped). When payments from bankruptcy are made to creditors, these obligations will need to be paid before other creditors or taxes are paid. As for property settlements, B WILL NEED to file a petition to preserve B's rights to the property, otherwise that debt could be wiped out or extinguished! All that hard work for nothing!
Does that all sound terribly complicated? Good. That’s because it is. The information above is only a snapshot of the potential problems and is not even close to “full disclosure.” As this article attempts to drive home, you should consult with a qualified attorney, CPA, and/or other relevant professionals before signing your property settlement.
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