When a husband and wife face a relatively simple divorce (e.g., no children and little assets or liabilities) they can agree to be financially liable for debts that each person incurred (i.e., the legal terms for obtained) on his/her own. So, neither person is jointly liable for any of the other person's debt. For example, if the husband stops payments on his credit card bill, the credit card company may not seek payments from his former wife since she was not on her former husband's account. In this situation, if either of the formerly-married persons made the decision to file for bankruptcy, the divorce does not have an impact on bankruptcy procedure. If either or both of them qualified for chapter 7, they could do so and not be concerned about their prior divorce.
Another situation that may come up in divorce and bankruptcy situation is when the couple have joint debts (i.e., they are both financially liable for a specific debt). For example, they are joint account holders of credit cards, or under the Family Purpose Doctrine, they are jointly responsible for a debt. In some states, this type of scenario may come up when a former spouse incurs medical fees during marriage, which is generally treated as a joint or shared debt. So, her husband is legally responsible for those debts as well if the wife goes through medical procedures and cannot make payments.
Generally, it is not abnormal for a divorcing couple to find out they are financially liable for a debt and they are mandated to hold each other harmless from liability on that debt. In such circumstances, the court does not change the rights of the creditor. Stated otherwise, if both husband and wife are liable for a debt (i.e., it is a joint debt) and the court enters an order making only one of them responsible for that debt and to "hold harmless" the other former spouse, the following situation may occur:
If the husband fails to make payment to the creditor, the creditor has the legal right to contact the husband's former wife for payment. The creditor can also file a lawsuit against the wife in order to collect the debt. The wife may have no remedy or recourse against the creditor; however, she does have recourse against her former husband. Stated otherwise, she can request the judge to hold the former husband in contempt, due to his failure to follow the court's order to hold her harmless regarding the specific debt.
The option of which type of bankruptcy to file is fairly important in this situation. Please note that chapter 7 bankruptcy does not discharge or wipe out debts that are incurred in the course of a divorce or separation agreement. In other words, if the former husband files for bankruptcy relief under chapter 7, any debts that he was responsible for in his divorce will not be discharged. But under chapter 13, a person who owes a large amount of debt that he/she was responsible for in their divorce, can deal with such debts through a repayment plan.
In this scenario, if the former husband files bankruptcy under chapter 13 and lists his former wife as a creditor and co-debtor, and if he complies with his confirmed repayment plan, then at the conclusion of the repayment plan he will not be responsible for "divorce debt." Also, the court which was administering the divorce should not find the former husband in contempt, as long as the specific debt constitutes property settlement and is not child support or alimony.
This situation may apply to either of the spouses, i.e., the former husband or wife. If either person is liable for the debts of the other, stemming from their divorce settlement, a chapter 13 bankruptcy allows them to discharge that debt. However, a chapter 7 bankruptcy does not, and it permits the court to hold the non-paying spouse in contempt.
Please remember that debts regarding a domestic support obligation, such as child support or alimony, will not be discharged in chapter 7 or chapter 13. These types of debts can be repaid via chapter 13 bankruptcy. For more information on this topic, please contact Salar Atrizadeh, Esq. or visit the law firm's website at www.atrizadeh.com.