In Kentucky, as in all states, divorce and bankruptcy sometimes go hand in hand. If you and your spouse have a large amount of marital debt, filing a joint bankruptcy petition may be a way to resolve those debts before the divorce process begins. However, if your spouse files without you, this may leave you on the hook for these debts, and may even put your joint assets at risk of seizure. To protect yourself, you may wish to include an indemnification clause in your marital settlement agreement or divorce decree.
Kentucky is an equitable distribution state. This means that the court considers any property, including debt, acquired by either you or your spouse during the marriage to be jointly owned marital property, with certain exceptions. The state treats property that one spouse acquired before or during the marriage, by inheritance or gift, as that spouse's separate property. This is important during both divorce and bankruptcy. During divorce, Kentucky courts divide marital property between spouses in a way that is fair and just, based on the circumstances, which may result in an uneven split. When it comes to bankruptcy, a debtor must disclose all of his property and debts to the bankruptcy trustee. Since a debtor owns marital property with his spouse, he must disclose these assets along with his separate property. Depending on the type of bankruptcy he files, this may place marital property at risk of seizure.
Chapter 7 vs. Chapter 13
Chapter 7 and Chapter 13 are the two most common forms of bankruptcy filed in Kentucky. Since federal law governs bankruptcy, the process in Kentucky is similar to that of other states. In Chapter 7, the debtor gives up all his nonexempt assets, including marital assets, since he has partial ownership in them. The bankruptcy trustee then liquidates these assets and pays his creditors with the proceeds. If any debts remain unpaid, they are discharged in the bankruptcy, and the debtor's liability for them is extinguished. In contrast, the debtor doesn’t give up any assets in a Chapter 13 bankruptcy. Instead, the debtor enters into a repayment plan that lasts three to five years. As with Chapter 7, if any debts remain unpaid when the plan concludes, they are discharged and the debtor is no longer legally responsible for them.
Single vs. Joint Filing
Although you and your spouse are divorcing, you may want to consider filing for bankruptcy together. This may be preferable if the majority of debts are joint debts that you and your spouse owe. This is because you will remain responsible for these debts if your spouse files for individual bankruptcy and his liability is subsequently discharged. When this happens, the creditors will turn to you for payment, since they can no longer pursue your spouse. This is true even if your divorce decree assigns responsibility for those debts to your spouse. By submitting a joint petition, your liability will also be discharged. However, if the majority of the debt is separate debt that belongs to your spouse or is solely in his name, and you are able to protect some or all of your marital property with exemptions, it may make sense for your spouse to file for bankruptcy alone. Exemptions represent property you can protect from seizure under either federal or state law, such as the family home or vehicles. For example, as of 2013, you can exempt up to $22,975 of your home's value under federal law or up to $5,000 under state law.
When a debtor files for bankruptcy, regardless of the type, an automatic stay goes into effect. This stay prohibits creditors from pursuing payment during the bankruptcy proceedings. If you file a joint bankruptcy petition with your spouse, this stay will apply to both of you. However, if your spouse files alone, this is not necessarily the case. With Chapter 7 bankruptcies, the stay applies to the debtor only, which means that creditors will be free to pursue you for all joint debts, during and after your spouse's bankruptcy. Chapter 13, on the other hand, offers a co-debtor stay. This means the stay will extend to you for the duration of your spouse's bankruptcy, making you off-limits to creditors, as well. However, once your spouse receives his discharge, the stay goes away and the creditors are free to come after you, unless all joint debts were paid in full through your spouse's repayment plan.
If you choose not to file a joint petition, you can still protect yourself. You can include an indemnification -- or hold harmless -- clause in your marital settlement agreement or divorce decree. This clause entitles you to reimbursement for any marital debts you had to pay, in the event your spouse failed to pay them as required in the divorce. Indemnification clauses can also include language to prohibit your spouse from discharging other divorce obligations in bankruptcy. For example, domestic support obligations, such as child support and alimony, are never dischargeable in bankruptcy.