Eliminating Joint Debt Before Divorce
When I meet with clients who are considering divorce, I find that money problems are often a primary cause of their marital problems.
Credit cards, medical debt and home mortgage debt are the most common sources of money problems.
When a couple is in debt and considering divorce, I discuss whether or not filing a Chapter 7 bankruptcy before the divorce will make the divorce easier.
I also discuss whether or not filing a bankruptcy jointly before the divorce is a good idea.
Divorce can be expensive, not just paying for divorce attorneys, but paying separate living expenses, additional child care as well as child support and alimony.
Prior to divorcing, many couples realize that they will not be able to afford their monthly credit card bills after divorcing. The same is true for home mortgages.
(I will discuss loan modifications in another article.)
The first step in determining if a joint bankruptcy is a good idea is to make sure the couple gets along well enough to file a joint bankruptcy. If there is too much distrust or hostility, it may not be possible to file jointly.
The next step is to check both spouses’ credit reports. If all of the debt is in one spouse’s name, it may not be necessary for both parties to file bankruptcy.
Joint debt is debt for which both parties are liable. Spouses can create joint debt in several ways. A joint credit card is the most common type of joint debt.
An “additional card holder” is usually liable for the debt under the fine print of the credit card. Liability for a mortgage or home equity loan is determined by who signed the note. Medical debt, in Connecticut, is the responsibility of both spouses. It is also possible for the divorce court to order one spouse to pay the debts of the other spouse. Such an order is usually not dischargeable in bankruptcy.
Filing bankruptcy before the divorce can eliminate joint debt thereby eliminating a major point of contention.
If home mortgage debt is owed jointly, that is another reason to consider filing bankruptcy prior to the divorce. For example, one spouse commonly gets the marital home in the divorce. A quit claim deed is signed. Sometimes the spouse receiving the home agrees to hold the other spouse harmless for the mortgage debt. If no bankruptcy is filed, and years later the spouse who received the home decides they cannot afford the home, then the spouse who did not get the home would still be responsible for the mortgage debt, regardless of the hold harmless agreement. A default on the mortgage would still affect both parties’ credit scores and if the home is worth less than the mortgage debt, both spouses would be liable for the deficiency. If the home is sold as a short sale, both parties could have income tax implications. This is a big problem in Fairfield County, Connecticut where property values have dropped so significantly and many homes are under water.
Many divorce attorneys in Fairfield and New Haven Counties ask me to meet with their clients to discuss bankruptcy. When possible, I meet with both spouses, before the divorce is complete, to evaluate whether a joint bankruptcy is appropriate. I identify the issues that should be addressed before the divorce is finalized so that neither spouse is unknowingly left liable for the debts of the other after the divorce.
Divorce attorneys also ask me to review the impact of one spouse’s bankruptcy on the non-filing spouse.
Divorce is a painful process.
I try to make it a little less painful.