Bankruptcy after divorce can adversely affect the non-filing spouse.
- If your divorce settlement agreement is done incorrectly, it could create a financial disaster.
- Debtors must decide on whether to file bankruptcy before or after a divorce.
- Your post-marriage obligations must be specific in your settlement agreement.
Below is an example of a husband/spouse filing Chapter 7 bankruptcy after a divorce.
- In this case, the non-filing spouse was adversely affected. However, this could have been prevented.
Bankruptcy After Divorce
Husband Files Chapter 7 Bankruptcy
- The marital settlement agreement obligated the debtor to pay most of the matrimonial debts
- Nevertheless, the settlement Agreement did not include a hold harmless or indemnification provision.
- Agreement is incorporated into State Court Order.
- Ex-wife files a motion in State Court.
- She alleges her former husband (Debtor) failed to comply with the State Court order of marital debts.
- The ex-wife initiates an adversary proceeding in the Bankruptcy Court.
- The non-filing spouse states a claim against their ex-husband (Debtor).
- The claim is based on her ex-husband’s failure to pay agreed-upon marital debts.
- The ex-wife bases her adversary complaint on the premise of the specific terms of the settlement agreement and the Court Order.
Should the non-filing spouse's claim be excepted in Spouse's Bankruptcy?
It clearly could have been excepted (not included in the Bankruptcy). However, the non-filing spouse’s attorney did not include that provision in the Settlement agreement.
If the Settlement Agreement contained the required clause(s), the spouse that filed Bankruptcy could not include these debts in their Bankruptcy. The non-filing spouse’s debts would have been non-dischargeable.
Bankruptcy After Divorce Affects on Non-filing Spouse:
- The Court recognized the “new debt.”
- A “new debt” obligation to a former spouse or spouse is created generally by a hold harmless or indemnification provision within a domestic order or agreement.
- This provision was clearly not in the agreement.
- Counsel represented both parties. Either party has a right to indemnification as it relates to marital debts. That obligation should have and could have been included.
- The debtor could include the marital debts in his Bankruptcy case.
Settlement Agreements Must Be Clear
When Settlement Agreements are drafted and finalized, important clauses, if omitted, could adversely affect a party whose partner files Bankruptcy after the Divorce.
This you can see in the example above.
When a written agreement is drafted and signed, you must be careful that all provisions are clearly spelled out. The example above indicates that an agreement can have either a negative or positive affect on bankruptcy. However, each situation is taken case by case in bankruptcy.
- Know your rights and protect your rights.
Protect Your Rights - Bankruptcy can adversely Affect You.
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- Could bankruptcy be an option for either partner?
- You may not foresee the bankruptcy filing, but your rights should be protected so that it does not adversely affect you.
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