The Positives & Negatives of Bankruptcy Following a Divorce

by Rob Jennings
Bankruptcy can hurt your credit, but it can also give you a fresh start.

Bankruptcy can hurt your credit, but it can also give you a fresh start.

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For some couples, the fighting in their divorce centers not so much on dividing property as allocating debt. The new financial realities of their post-divorce worlds may cause one or both parties to consider filing bankruptcy. Depending upon your situation, filing bankruptcy could eliminate a significant portion of your money problems in the wake of your divorce.

Bankruptcy Effects

In a Chapter 7 bankruptcy, the debtor's non-exempt property is sold and the proceeds paid in proportionate shares to his creditors. In a Chapter 13 bankruptcy, the debtor has to devote a specified portion of his disposable income to paying back creditors for a period of time after the bankruptcy. At the end of each type of bankruptcy, the debtor receives a discharge of most — and sometimes all — of his debt. This makes bankruptcy an efficient way of eliminating a crippling debt load either before or after a divorce. Some debts, though — family support debts, student loans and tax debts, to name a few — aren't dischargeable.

Timing

Filing for bankruptcy during a pending divorce case will stall your divorce. Bankruptcy proceedings are federal, which means that they trump your state-based family law case. Furthermore, if you obtain a discharge of your debts and your spouse doesn't, you could cause problems for your alimony case. Not having to pay all your creditors makes more of your income available to either pay alimony or reduce your need for it. If you wait until after divorce, though, you will not be able to file a joint petition and might have to file separately. This could double your costs.

Impact Upon The Other Spouse

Just because you get a discharge of your debt doesn't mean the creditor can't go after your spouse as a co-debtor. Your spouse could be responsible to the creditor for the entirety of the joint debt even if a family court judge assigned the debt to you. If you declared bankruptcy under Chapter 7, your spouse could take you back to family court to seek reimbursement, as responsibility to a former spouse for marital debts generally can't be discharged in that chapter.

Alimony

If you've obtained a discharge of joint debts under Chapter 13, the increased liability for debts that were originally assigned to you — and the concurrent decrease in your own liabilities — could place your spouse in greater need of receiving alimony. With less of your disposable income, and more of hers, going to debt service, the balance of need versus ability to pay could shift in her favor. If she never asserted an alimony claim prior to the entry of the divorce decree or you resolved alimony in a marital settlement agreement that contains no modification provisions, this remedy may not be available to her. If alimony has yet to be determined or is subject to modification, though, the money you save in bankruptcy could wind up going to your spouse as increased alimony.