A common problem after a divorce is the family court’s order concerning joint debt.  The order will typically direct one party to pay or refinance a joint debt.  Many are surprised to learn that this order does not relieve a parties’ obligation to pay the debt.  The simple explanation is that the family court judge does not have the authority to rewrite a contract between you, your spouse, and a creditor who is not a party to your divorce.  If your spouse does not pay the joint debt, your credit may be harmed.  

On the other hand, by filing a bankruptcy prior to the divorce, most joint debts can be legally and finally terminated either by payment or discharge.  Additionally, by resolving many of your outstanding debts, it is easier to negotiate the remaining obligations between you and your spouse. 

Married couples also enjoy protections in bankruptcy that single debtors do not receive.  For instance, married couples often receive increased legal exemptions that protect property from creditor attachment.  These exemptions may be lessened or no longer available once the divorce is finalized.  In other words, what you could protect in bankruptcy while married may not be protected after a divorce. 

To say that the interplay between the state family laws and the federal bankruptcy laws is complex is a gross understatement.  However, many of these complexities can be avoided by filing a bankruptcy ahead of a divorce.  In some cases, the couple decides to stay together after the financial strain is removed by the bankruptcy. 

If you and your spouse are considering divorce, consult with an experienced bankruptcy attorney and have your finances examined.  If bankruptcy is a possibility, it is generally better to proceed with the bankruptcy case prior to the divorce.

A court-ordered debt to a former spouse is given special consideration by the bankruptcy laws.  In a Chapter 7 bankruptcy case these debts are generally non-dischargeable.  An order directing payment to a third party (e.g. a mortgage payment) is also generally non-dischargeable if the payment is effectively a form of spousal support.  Even an obligation to pay your ex-spouse’s attorney fees in connection with the divorce proceeding is generally non-dischargeable. 

While past due support obligations are also non-dischargeable debts in a Chapter 13 bankruptcy, debts not in the nature of support (e.g. a division of marital property) can be discharged.  The ex-spouse must contest the debtor’s characterization of the obligation and convince the bankruptcy court that the debt is a support obligation in order to save it from discharge.  If the court determines the debt is a support obligation, it must be paid by the debtor through the Chapter 13 bankruptcy. 

Whether the family court-ordered obligation arises from a property division or from a support obligation, the ex-spouse will likely suffer harm from the debtor’s bankruptcy filing.  The sad truth is that any non-payment of a joint monthly obligation will harm the ex-spouse’s credit report and there is little that can be done to remedy it.  If the debt is discharged through the debtor’s Chapter 13 bankruptcy, the creditor may elect to pursue the ex-spouse and there will be no recourse against the debtor. 

Regardless whether you or your ex-spouse owes a court-ordered joint obligation, if bankruptcy is in the future, you should seek professional help.  It is important to evaluate the impact the bankruptcy will have on the debt and determine a course of action that will best protect you.  Timing can be very critical, so consult with an experienced bankruptcy attorney early.

          Calculate your net worth by taking inventory of your assets and liabilities.  Summarize all of your assets including the value of your home, cash, savings or checking accounts, any valuables such as jewelry, antiques or artwork and any retirement accounts.  Subtract the amount that you owe on all of your debts.  Be sure to include payments that are made quarterly or yearly.  

          Prepare a budget based on your new income level and stick to it.  Look at your income and liabilities.  Be sure to budget for car repairs and other unexpected expenses.  If the amount you spend is more than your income, you will need to make some choices about expenses you can cut.  You may need to take your lunch to work, or cut back on activities for yourself and your children.  

          Make certain that joint accounts with your ex-spouse are closed. You do not want to be held responsible for debt that your ex agreed to pay in your settlement. Be sure to check the mortgage, automobiles, insurance and credit cards.  Take the appropriate steps to transfer titles if needed.  Be sure that any joint checking or savings accounts are closed. Establish new accounts and credit if you haven’t already done so. 

           Update your beneficiary on your life insurance, investments and retirement plans. Remember to update your will and any trusts.  If your ex-spouse covered you on their health insurance, get your own policy or make sure you are covered by COBRA benefits. 

          Try to keep emotions out of your financial decisions and don’t dwell on the split from your spouse.  It is up to you to take care of yourself in all aspects of your life, including your money.

In dividing assets, it is just as important to know what one is giving up as it is to know what one is getting.  It is encouraged for a couple to agree to the division of the marital property; however full disclosure of assets and debts is the only way to fully understand the complete financial picture of the marriage.

 Many may believe that such disclosure is a waste of time since they have already agreed on who gets what.  The importance of disclosure comes down the road when one discovers that the other had been putting a good portion of money into their retirement, or when one discovers that their name is on debt that they didn’t know about.  Divorcing couples still want to believe in each other and not assume the worst, but these types of scenarios occur every day. 

The bottom line is to be informed; know what you are giving up before signing an agreement.  It may avoid pain from the past from coming into your future.

Analysis of the Law: Domestic Support Obligations are defined by the bankruptcy code (11 USC 101(14A)) as a debt that accrues before, on, or after the date of the discharge that is owed to or recoverable by a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative. Included is alimony, maintenance, or support, that is established by a separation agreement, divorce decree or property settlement agreement or order of a court (11 USC 523(a)(15).

Outcome: Fortunately for Sondra, the Kentucky Courts share jurisdiction with the Federal Courts to decide if an obligation is discharged. (Mattingly v. Mattingly, 164 S.W.3d 518 (Ky. App. 2005)). The Kentucky Court of Appeals held that Roy’s debt on the Durango was a domestic support obligation and that even though the bankruptcy had discharged the debt as to the original creditor, that creditor could still pursue Sondra for the debt. Sondra was then able to come back to the divorce court and have Roy held in contempt for non-payment on the Durango. Therefore, Roy has to pay Sondra for the debt rather than the original creditor. See Howard v Howard, 2008-CA-001059-MR (June 12, 2009) (to be published).