Bankruptcy and Divorce:
One of the most common, and most problematic areas is the intersection of bankruptcy and divorce. A few basics can help the understanding here.
Absent bankruptcy, a married couple can have debts just in the husband’s name, just in the wife’s name, or in joint names. A bankruptcy by one spouse does not affect the other spouse’s liability on the joint debts or the debts owed just by the other spouse.
There are two scenarios where bankruptcy could come into play. If the bankruptcy is filed prior to the divorce, then the bankruptcy would normally eliminate the debts of the spouse that files bankruptcy to the creditors listed in the bankruptcy (to the extent that such debts can be eliminated, usually credit cards, medical bills, etc.) The problem arises in that the divorce order may include a clause (such as a ‘hold harmless’ clause) that requires one spouse to reimburse the other for any debts that other spouse has to pay. If the bankruptcy is filed before the divorce, the bankruptcy cannot affect this liability to the other spouse even if the spouse filing bankruptcy eliminated the debt to the original creditor in the bankruptcy.
If the bankruptcy is filed after the divorce, more options appear. If the bankruptcy is filed under Chapter 7, it still will not eliminate any debt to the non-filing spouse per the divorce order, whether alimony or property settlement. If the bankruptcy is filed under Chapter 13, the bankruptcy can eliminate property settlement debts, but will not affect alimony or child support. However, this could case the non-filing spouse to go back to the divorce court an attempt to adjust or create a new award for alimony. Clients should consult with both competent divorce and bankruptcy counsel.
If one spouse ‘ran up’ credit cards on the other shortly prior to the filing of the bankruptcy, this causes more issues. Normally debts incurred shortly before bankruptcy have a substantial risk of being subject to a lawsuit in bankruptcy for the creditor to request that the debt is not eliminated by the bankruptcy. Defending against this type of lawsuit can be quite expensive. However, if the actual charges were made by the spouse that did not file bankruptcy, and it is a joint debt, the creditor can still pursue that non-filing spouse. If the debt was just in the name of the spouse that filed bankruptcy, and the non-filing spouse that ran up the debt was an authorized user, but the spouse that filed bankruptcy did not specifically authorize those charges, again it is possible that the non-filing spouse could still be held liable for such charges, though this situation is quite rare. Normally counsel would recommend waiting a few months prior to filing bankruptcy in this situation to reduce the risk of such lawsuits.
A final concern with bankruptcy and divorce is that if a divorce order is entered within 6 months of the date a bankruptcy is filed, and that divorce order awards a property settlement to the spouse that filed bankruptcy, the bankruptcy trustee (the person appointment to supervise the case) may be able to take such property settlement.
Given all the different concerns related to bankruptcy and divorce, It is important to consult experienced, board certified counsel who are familiar with all the options before deciding on the timing of the filing of a bankruptcy when a divorce is pending or planned.