Bankruptcy and divorce

While it’s true that many American bankruptcies stem from medical expenses, job loss or sudden loss of income, a fair amount of them relate to divorce. A divorce means divvying a single household – and its income – into two. This means twice the expenses, twice the utilities, twice the mortgage or rent payments, etc.

Whether the divorce comes first or the bankruptcy does is really a “chicken and egg” type of issue. One can invariably lead to the other, regardless of which came first. Seeing as bankruptcy and divorce so often intertwine, though, it’s important to understand how the interplay between the two.  

Bankruptcy, then divorce

If the bankruptcy of one or both spouses comes before the divorce, things will need to be handled in a particular manner during the divorce, particularly regarding property settlement. The discharge of debts prior to the divorce proceedings will impact the division of assets and liabilities by the court. Should only one spouse, for example, discharge all of his or her personal debts through bankruptcy before divorce, it’s possible that he or she might receive, in the interest of fairness, a larger share of joint debts.  

Divorce, then bankruptcy

A bankruptcy filing coming after a divorce is finalized is a bit trickier in terms of debt division. This is well-illustrated with an example. Let’s say that June and Ward divorce. There’s an equal division of all marital assets and joint debts. Shortly thereafter, Ward files for bankruptcy protection and receives a discharge for his assigned portion of the joint debts.  

This doesn’t mean, however, that joint debt itself actually goes away. If Ward is no longer legally obligated to pay it because of the bankruptcy discharge, the debt will revert back to June. Debt holders are not legal parties to divorce proceedings; if June was originally legally liable for the debt, then she is still liable if Ward doesn’t have to pay it.

If Ward was responsible for the debt under the marital settlement agreement, he may discharge his liability, but June could still have a nondischargeable claim against him in his bankruptcy case for payment of the debt.

Bankruptcy is a complicated process that needs to be handled with extreme care, particularly in situations where divorce is also in the mix. Reach out to a skilled bankruptcy attorney to learn more about how your unique financial situation should be handled.