Money often becomes an issue for couples filing for divorce, but how do you use your divorce agreement as protection from a spouse who files bankruptcy? Let’s take a look at how an ex-spouse’s bankruptcy might impact you and what you can do to protect yourself.
Since the finances of married couples are legally entwined, it’s inevitable that one spouse can be held liable for the debts of the other. But this can become problematic during and even after a divorce. If your spouse decides to file bankruptcy on debts that have you as a co-applicant, you could be held liable for that debt even as your spouse is discharged from their responsibility. But depending on the type of debt owed, there may be some actions you can take to protect yourself.
It’s important to understand that in most cases debts categorized as “support payments” are not dischargeable in bankruptcy. For example, if you receive a decree in your divorce saying that your spouse must pay you $1,000 a month in alimony and/or child support, your spouse won’t be able to get out of paying that even if they file bankruptcy.
If you’re a co-applicant with your spouse on consumer debts such as a credit card or a car loan, if your spouse files bankruptcy, the trustee may grant your ex-spouse a discharge but the creditor may still come after you for payment. However, if you have something in your divorce agreement stating that your ex-spouse is responsible for pay certain debts such as a credit card or car loan, they may not be able to use bankruptcy to discharge their obligation to pay you.
For divorcing spouses who share property, hashing out an agreement on how the property (and mortgage) should be handled is beneficial to both parties. However, having the agreement in the divorce settlement is an important protection if one of the spouses files bankruptcy. For example, if your spouse has agreed to pay 50% of the mortgage for five years, then having this in your divorce agreement may prevent the insolvent spouse from discharging their obligation (to the spouse) in bankruptcy court. In other words, the ex-spouse filing bankruptcy might be allowed to discharge their obligation to the mortgage company but they won’t be allowed to discharge their obligation to their ex-spouse.
If you’re going through a divorce and your spouse is considering bankruptcy, make sure your divorce agreement is written in such a way that it protects your financial interests.