Debts incurred during marriage are often the focal point for couples considering divorce. For example, one spouse might accumulate credit card debt that he or she becomes unable to pay. If the other spouse is listed on the account – and therefore shares responsibility for paying the debt – he or she may be forced to pay it off. Such money issues have caused many otherwise loving relationships to implode.
Unfortunately, debts can cause lingering problems, even after a marriage ends. The amounts owed do not simply disappear. Worse, one party may still be forced to pay off debts accumulated by his or her ex.
For some couples, the solution is to declare bankruptcy.
In the following article, we’ll describe the motivating factors that push many divorced – or divorcing – couples toward bankruptcy. We’ll also explain how your ex’s Chapter 7 filing can affect you, even years after your divorce is finalized. Lastly, you’ll learn about circumstances that might warrant declaring bankruptcy yourself.
Why Divorced Individuals Often File For Bankruptcy
It’s not uncommon for individuals to rack up a large amount of debt. They assume they’ll be able to pay it off eventually, even if they can only pay the minimum amount due each month. (Few people realize how many years it takes to retire a debt by making minimum payments.)
In many cases, unanticipated events cause a person to have difficulty paying the minimum amounts due. For example, she might lose her job or need to pay for an emergency, such as medical treatment for a serious illness. Faced with large bills and not enough income to pay them, she eventually files for Chapter 7 bankruptcy (liquidation).
At first, it might seem as if her bankruptcy affects no one but herself. In reality, it can actually ruin her ex’s credit, even if several years have passed since their divorce.
How can this happen? The problem stems from both parties being listed on credit-related accounts. For example, many couples share credit cards. Both spouses are listed on the accounts, and thus both are responsible for the debts incurred, regardless of who incurred them. Creditors can come after both parties if payments are missed.
As noted earlier, for many people, the answer is to seek protection under Chapter 7 bankruptcy.
What Happens If Your Ex-Spouse Files For Chapter 7?
Suppose you and your ex-spouse got a divorce with a substantial amount of consumer debt hanging over your heads. Both of you are listed on the accounts that carry a balance, and thus both of you are responsible for paying them off. Further suppose that a majority of the debt was incurred by your ex. Both of you might agree in the settlement that your ex should be responsible for paying it off.
Let’s say your ex misses several payments, and eventually files for bankruptcy. If he were the only person listed on the accounts, the debts would likely be erased (note that bankruptcy laws vary by state). But since you are listed on the accounts, creditors can now come after you for the money.
It does not matter that your settlement agreement stipulates your ex’s responsibility to pay off the debts. Creditors are not bound by settlement agreements. Faced with your former spouse’s debts, you might be forced into Chapter 7 as well.
Filing For Bankruptcy Before Getting A Divorce
If you’re considering divorce, and you and your spouse are having trouble paying your credit cards and other debts, filing for joint bankruptcy may be a good idea. Doing so before you file for divorce aggregates and discharges your jointly-held debts. That alone will streamline the settlement negotiations and the division of your marital property.
Filing for Chapter 7 while going through a divorce will delay the divorce process, typically for several months. Courts will refrain from finalizing a marriage dissolution, along with the settlement agreement that specifies how marital property will be split, until the bankruptcy has been completed. That puts the entire process on hold.
If you and your soon-to-be ex-spouse are on good terms, now is the time to discuss filing a joint bankruptcy. Doing so can simplify the settlement negotiations for your upcoming divorce and help both of you get your lives back on track much sooner. If you have questions regarding the best approach to take given your circumstances, consult an experienced divorce attorney about your options.