When Divorce and Bankruptcy Collide

Unfortunately, one calamity often leads to another and sometimes divorce and bankruptcy occur in tandem.

In this entry, you'll find an explanation of why bankruptcy and divorce sometimes go hand-in-hand and what you may expect if the two happen in your life.

Financial Stresses of Divorce

It's no secret that divorce can be financially stressful.

Besides lawyer and court costs, you and your spouse will probably be expected to spread your incomes over two households rather than just one. And, if one spouse must now find a new job, childcare costs may come into play.

Bankruptcy and divorce statistics:

• From 1980-2008, statistics on bankruptcy filing show that more than 90 percent of filers experienced job loss or medical hardship during their divorce. This suggests that such financial stressors may frequently lead Americans to file bankruptcy.
• Many divorce cases involve some sort of alimony and/or child support payments. For those already struggling, this may prove to be too much to manage.
• Depending on the laws of your state (community property or equitable distribution), you may find yourself owning less property and more debt than you did before your marriage.

Bankruptcy Before Divorce

If your spouse starts bankruptcy proceedings before the divorce is finalized, you might want to consider filing bankruptcy jointly, especially if the majority of the debts are held jointly. 

Because creditors are not parties to a divorce agreement, you will still be held liable for the debts even if your spouse is the only one declaring bankruptcy. By filing jointly, you can save a lot of headaches in figuring out how debts will be allocated in the divorce settlement agreement.

A joint bankruptcy filing is typically not available to divorced couples, even if much of their debt is jointly held.

For this reason, if you're still married and contemplating both bankruptcy and divorce, you may want to consult with a bankruptcy lawyer before dissolving your marriage.

Bankruptcy After Divorce

So, how could bankruptcy potentially help struggling divorcees?

• Chapter 13 Bankruptcy: This type of personal bankruptcy allows petitioners a period of three to five years to catch up on their past-due debts by making regular payments in a repayment plan. It tends to work well for those with a dependable source of income and/or significant non-exempt property they'd like to keep.
• Chapter 7 Bankruptcy: This type of personal bankruptcy offers petitioners a complete discharge of many unsecured debts (debts not attached to any property). Keep in mind, though, that the debt designations of the divorce court may not hold up in bankruptcy court: that is, if a jointly held debt is assigned to the spouse who files for Chapter 7 bankruptcy, the other spouse will likely be responsible for paying it.

Because of the possibility of one spouse becoming responsible for debts assigned to the other during divorce, it's important to contact your ex-spouse if you're considering a bankruptcy filing.

Bankruptcy Can't Eliminate All Debts

If you saw your income decrease after the terms of your divorce were settled, you may be worried about keeping up with support payments as well as your mortgage/rent and regular bills.

But the place to modify the terms of your divorce is probably in the divorce court, not the bankruptcy court.

The following debts are not dischargeable in bankruptcy, meaning that filing bankruptcy will not likely relieve you of your responsibility to pay:

• child support
• alimony/spousal maintenance
• student loans
• most tax debt
• some criminal fines and penalties

If you need help in resolving any of the above debts, don't despair: bankruptcy may still offer you relief by possibly excusing you from other debts so you have enough money to cover your support/maintenance payments.

If you'd like to learn more about how Chapter 7 or Chapter 13 bankruptcy could help you, you may want to speak with a bankruptcy lawyer in your area.

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Credit Considerations
Divorce and Credit Card Debt 
Divorce Settlement Considerations
Handling Divorce Debt
Debt After Divorce - Relief Options
Other Divorce and Money Issues

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