Bankruptcies declared after a 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 wherein a spouse files 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 marital 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.
- Husband declares Chapter 7 bankruptcy after the divorce.
- Ex-wife initiates an adversary proceeding.
- The non-filing spouse states a claim against her ex-husband (Debtor).
- Claim is based on her ex-husband’s failure to pay agreed-upon marital debts.
- 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 from discharge in the declared bankruptcy of her ex-husband?
Bankruptcy Filing After Divorce – Affect on Non-filing Spouse:
- The Court recognize 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.
- Both parties were represented by Counsel. Either party has a right to indemnification as it relates to marital debts. That obligation should have and could have been included.
- Debtor could include the marital debts in his Bankruptcy case.
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.
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