Bankruptcy, Your Spouse, and Divorce

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Bankruptcy outcomes usually depend on state law. When there are issues concerning spousal support, alimony, or property settlement involved, however, bankruptcy courts are relying increasingly on federal law instead.

Rather than just a simple bankruptcy filing, these cases may require several visits to lawyers specializing in different areas of the law, or even lawyers in more than one state depending on the location of spouses and property. In such cases the court may not only overlook state law, in fact, but may even overlook personal agreements made between the former spouses, as well.

• Alimony While most states west of the Mississippi allow alimony, many states to the east also have spousal support that is called ‘temporary alimony’. Neither of these debts can be discharged in bankruptcy, because promises between spouses take precedence over financial hardship and bankruptcy, according to Congress.

• Community Property Community property laws exist in nine states: Arizona, California, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. All other states adhere to what is called “equitable distribution”. In those states with community property laws, a spouse who does not file for bankruptcy still can face creditors’ claims if the other spouse files. In such a case, the non-community property of the filing spouse is utilized first to pay the debts, but if this is insufficient, community property can be used. The rules for exemption of property do still apply, however, and they may protect community property. 
  

• Separate Property Even in states with community property laws, some separate property (such as property acquired individually, especially before marriage) cannot be taken by creditors when only one spouse files.

• Credit Reports Credit reports quickly can turn into a battle of forms. “Co-signing” for a spouse who has filed bankruptcy previously sometimes can result in a note on the innocent spouse’s credit report, especially if the filing spouse listed his or her share of a joint debt. Even if one spouse does not file, it is crucial that both spouses carefully monitor their credit reports. They both should argue for complete accuracy – there is no reason why bankruptcy necessarily should poison both reports.
  
  Many states now have laws that protect spouses, especially after divorce, from discrimination in credit reporting due to the other spouse’s actions. By contacting your state’s Attorney General’s Consumer Affairs office, you can file a written complaint and may find relief.

• Mortgages One of the largest problems concerning bankruptcy and divorce is when one spouse gets the house, and subsequently lists the mortgage in bankruptcy. If both spouses took out the loan together, then it is likely that both spouses (even if they split up during the bankruptcy) remain liable on the loan.
  

In bankruptcy cases involving couples, financial strain can lead to emotional strain, so protect your assets as well as possible. Communicate openly about your finances, and consider seeking separate legal advice to protect your separate assets.