This blog is dedicated to all of you divorce lawyers in Minnesota. The interplay between divorce and bankruptcy is significant. After all, the break up of any relationship will cause any one of us an automatic decrease in income- you have lost your significant other’s income after all.

Adding to the immediate loss in income, is the added expense of another household and everything that goes with it; rent, utilities, groceries, etc. Now pile on this the expense of divorce lawyers, custody studies, and everything else that goes with a contested divorce and you have a recipe for financial ruin.

Sometimes, your clients are able to look to parents for gifts of money or loosely described loans from relatives. If this is your client, they “may” avoid financial catastrophe. However, if your client, is like so many others, they look to pay these added expenses by financing them the American way, the credit card.

Of course, the real problem is many of these clients come to you already swimming in debt. Second mortgages, medical bills, credit card debt, pay day loans, etc all play a big part in the financial devastation. For many, when they were together, they were barely able to make ends meet. But being apart, and give the above added expenses, and drop in income, repaying much of this debt becomes simply impossible.

Wanting to represent your client and protect their interests, the subject of bankruptcy comes up. How does it work? What if my spouse does not file with me? What kind of language should be in the divorce decree about debt if one or both are contemplating filing a bankruptcy? These are just some of the land mines that lay on the road for divorce lawyers.

1) HOW DO CHAPTER 7 BANKRUPTCY AND DIVORCE AFFECT BOTH PARTIES?

When I speak to a party who is in a divorce, and needs to file a bankruptcy, the first words that roll off my tongue are- you never are truly divorced when you have joint debt. As a divorce lawyer, you know that if husband agrees to pay all the joint credit card debt (50k) but does not, the creditors will look to ex-wife for payment of the debt.

Ex-wife says- hey wait a minute, I have a court order saying ex-husband was required to pay the joint debt, doesn’t that mean anything? No, it does not. Creditors are not a party to your divorce. They don’t care what husband and wife agree to, they only care that they have two fishes on the hook and they may pursue either fish for the debt regardless of what husband and wife agree to in the divorce decree.

Now, lets continue with the above example. What if divorce decree requires ex-husband to pay the joint debt and “hold harmless” ex-wife? If so, of course ex- wife can sue ex-husband for any damages she incurs as a result of ex-husband’s failure to comply with the divorce decree and pay the debt. But, what happens if ex-husband files a chapter 7 bankruptcy and wife does not want to?

Section 523(a)(15) of chapter 7 bankruptcy code makes any debts or property settlements owed by one spouse to another in a divorce decree non-discharge able- meaning that the debt owed to the ex-spouse survives the chapter 7 discharge.

The code used to say these debts were “discharge able” unless the damaged ex-spouse brought an action in the bankruptcy proceeding to have the debt owed by the spouse held non-discharge able. The code no longer requires this.

So, what the hell does this mean? Well, it means this: if ex-husband files a chapter 7 bankruptcy against the 50k in credit card debt, his liability to the credit card companies will be discharged. Visa could no longer sue ex-husband. However, if ex-wife pays the Visa bill, when ex-husband was required to pay it and agreed to hold ex-wife harmless, ex-wife can now sue ex-husband for the money she is out since the code does not discharge his liability to ex-wife.

If you are the lawyer representing husband in this deal, and you knew husband was going to file bankruptcy, would the inclusion of the “hold harmless language” be malpractice? I think it would be.

It is important to note that the chapter 13 code has no exception to discharge like section 523(a)(15). Thus, if ex-husband filed a chapter 13 bankruptcy, ex-husband’s liability to ex-wife on the joint debts is discharged upon completion of the plan. As a bankruptcy practitioner, we may advise a client to file a chapter 13 bankruptcy as opposed to a chapter 7 to include the liability owed to ex-wife, or whatever the case may be.

A word of caution is in order here though- chapter 13 bankruptcies must be filed in “good faith.” If ex-husband agreed to assume the entire joint debt (50k), and maybe received more marital assets in contemplation of taking the joint debt, knowing he was going to file a chapter 13 bankruptcy, and get rid of his liability to the creditors and ex-wife, I question whether the chapter 13 was filed in good faith.

The fact of each case would need to be investigated but I would want to know; 1) how long has it been since the divorce was finalized?, 2) did ex-husband make payments on the debts?, 3) for how long?, 4) how much?, 5) why did ex-husband quit paying?, 6) did he suffer a decrease in income?, 7) is his income the same or even better than when the divorce was finalized?, 8) did some other event happen that was traumatic and impacted ex-husband’s ability to pay?

Depending on the facts above, I would consider objecting to ex-husband’s plan confirmation based on the lack of “good faith.”

2) IF BOTH PARTIES NEED TO FILE A BANKRUPTCY, FILE THE BANKRUPTCY BEFORE THE DIVORCE IS FINALIZED.

This is sort of a common sense point. If both parties need to file a bankruptcy, file the bankruptcy before the divorce is finalized. As long as the parties are still married, they can file a joint bankruptcy petition. Once the parties are divorced, both parties must file separate bankruptcy petitions.

The only caveat to the above is this: if the parties are not getting along, or if the parties disagree as to the nature and extent of assets or debts, then they must do separate bankruptcies. Since the parties sign the petition and schedules under penalty of perjury, we cannot have a spouse saying hey, the boat is worth 10k and the other spouse saying, no the boat is worth 4k. If that is the case, separate bankruptcies is a must. The extra expense in fees is dwarfed by the complication of having one spouse state that information on the schedules is not correct.

If the parties both file for bankruptcy, careful drafting of the divorce decree is required. The debts can be easily dealt with by stating the parties have filed a joint chapter 7 bankruptcy on all debts up to the date of filing. Any debts incurred by either party since the filing of the bankruptcy is the responsibility of the person who incurred the debt.

Also, any debts that are not discharge able in a bankruptcy case such as student loans, child support, taxes etc must be assigned to one of the parties and it would be appropriate to use ‘hold harmless” language with those debts.

Careful consideration must be taken when you have one or both parties with significant joint debt. We often have divorce lawyers who call us and ask us for advice in particular situations. We encourage you to do the same.