This post is Part Two in a two-part series by Brooke McDonald on how a divorcing couple, and a couple who has divorced but still has debt problems, can benefit from a bankruptcy. Part one examined consideration of getting a bankruptcy before the divorce. This post examines consideration of mutual bankruptcies after the divorce.
In my last post, I examined how a pre-divorce bankruptcy can benefit couples in debt – but what about couples who have already divorced?
A story will serve our purposes and better illustrate the problem – and possible solution – at hand.
Cindy and John have been married for four years. They are planning to get a divorce. During their marriage, the couple did not pay off several large purchases made with credit cards, and Cindy incurred student loan debt while earning her MBA. During the pre-divorce negotiations, the couple works with a mediator to divide their assets. Through the Marital Settlement Agreement, the majority of the credit card debt is decided to be John’s responsibility and the remaining credit card debt and student loan debt is Cindy’s.
Soon after their divorce, Cindy begins to pay back her grad school debt. She is adjusting to living on her single salary and finds it challenging to pay back the debt. John stumbles into hard times after his divorce. He takes a pay cut at work and encounters some health difficulties. These factors make paying back his debt nearly impossible, so he gets behind on his payments.
John’s bank, waiting for payments it never receives, then pursues Cindy and sues her for the debt. As a third party creditor, the bank is under no restrictions from the divorce and the divorce court. Because of this, Cindy is still under a legal obligation to the bank. Even though the divorce court has ordered John to pay the debt, the bank can still legally pursue Cindy if she has not filed for bankruptcy.
Clearly, the post-divorce implications for couples who carry debt into their post-marriage lives can become rather messy.
Cindy and John have several options, some better than others:
John can file for bankruptcy on his own. However, because John’s debt to the creditor bank will be discharged, and the creditor cannot sue him to get an order to pay it, the creditor will likely sue Cindy. The creditor can still legally pursue Cindy because Cindy and John’s agreement to split the marital debt fairly was only binding on the parties to the divorce in divorce court, not the creditor bank.
Although this seems unfair to Cindy, this is how collection works – the non-bankrupt spouse is targeted for the marital debt because she never stopped owing it to the creditor, as far as the rights of the creditor go. Cindy would have the legal right to collect any monies she has to pay out from , but this may not prove a viable option if John doesn’t have any assets out of which to satisfy a judgment. If he hasn’t the money to give, a court order to give it won’t be effective to get it.
Because they are no longer married, Cindy cannot declare bankruptcy jointly with John. As was explained in Part One of this series, this would have been a good thing to do before the divorce given the circumstances – Cindy and John would have cleared away debt that could otherwise come back and bite them, and saved some of their bankruptcy-related costs, too. It is still a good thing that she file if her circumstances make that the best option and if she qualifies for bankruptcy relief. Her option here is to consider filing her own, parallel and separate bankruptcy. This option is advantageous to both individuals. Because both Cindy and John are struggling financially, having their debt discharged and preserving their remaining assets via parallel bankruptcies could reduce harm to both of them; and creditors cannot bother either of them.
While some ex-spouses try to get out of their divorce court obligations by filing for bankruptcy, that’s seldom the reason for the bankruptcy filing. The filing, however, sends the other spouse into a tailwind of fear and burden of debt they are now responsible for. Bankruptcy for both individuals prevents one ex-spouse from being harmed by the other ex-spouse’s bankruptcy.
Every situation is different. Divorced couples have varied financial pictures, and not every situation resolves cleanly in a one-size-fits-all solution.
Talking to an attorney about your situation will give you the best idea of what to do.
Brooke McDonald is an avid writer and online contributor for Minneapolis MN bankruptcy attorney Chad A. Kelsch at Fuller, Seaver, Swanson & Kelsch, P.A. She enjoys covering legal issues and has worked as a reporter for a legal publication. The views expressed here are Brooke’s own and not necessarily those of Fuller, Seaver, Swanson & Kelsch.