Bankruptcy & Divorce Settlement

Bankruptcy and divorce are often connected.

Divorce and bankruptcy often go hand-in-hand. Both situations can be devastating personally and financially. The divorce rate in America is staggering, and it increases dramatically in second and third marriages. If tremendous debt is an issue in your marriage, bankruptcy before or during a divorce settlement is often the best option.

Divorce

Half of all marriages in America end in divorce. Statistics from divorcerate.org show the divorce rate for first marriages to be about 50 percent. One of the main causes for divorce is financial burden. It is no surprise that bankruptcy and divorce often coincide. The amount of consumer debt grew tremendously between 1990 and 2010. To finalize a divorce, a settlement must be reached. Some couples go to court if they are not able to reach a settlement amicably.

Types of Debt

Divorce Education Center of New Jersey (decnj.org) identified the four main types of debt: secured, unsecured, tax and divorce expenses. Secured debt is essentially a debt that was incurred for good reason. The mortgage on your home is an example of a secured debt. Unsecured debt is mostly credit card debt. Tax debt is outstanding money owned to the Internal Revenue Service or your state tax department. Divorce expense debt is incurred during the process of separation and divorce. Maintaining separate living dwellings and attorney fees are examples of divorce expenses.

Types of Bankruptcy

There are three main types of bankruptcy for individuals: Chapter 7, Chapter 11 and Chapter 13. A Chapter 7 bankruptcy generally discharges all debt. Only child support, tax liens and alimony remain after a Chapter 7. A Chapter 13 bankruptcy acts as a type of repayment program. Many of the garnishments and collection tactics are removed, and the individual can repay those debts, like child support, that are not dischargeable under a Chapter 7. Some people file both types of bankruptcies: a Chapter 7 and then a Chapter 13. If one of the divorcing spouses is a sole-proprietor or a partner in a general partnership, a Chapter 11 may be filed in an effort to discharge business debts.

Settlement Options

Many attorneys advise clients to declare bankruptcy before entering into a divorce settlement. Filing bankruptcy during a divorce can be troublesome for the non-filing spouse, unless both spouses agree and are aware of the circumstances. If two people are not on amicable terms, it is possible for a spouse to file bankruptcy after a divorce settlement and eliminate his or her responsibility to pay back certain debts. The Moran Law Group points out that the 2005 amendments to the Bankruptcy Code do not allow spouses to discharge divorce expense debt; however, other secured and unsecured debt is still dischargeable.

Warnings

Divorce Education Center of New Jersey warns people to consider whether or not a former spouse may file for bankruptcy after a divorce settlement is reached. Unfortunately, a former spouse may decide to file out of spite, leaving most of the financial responsibility to the other spouse. This can adversely affect credit scores and possibly push the other person into bankruptcy as well.

References

• Divorce Education Center of New Jersey
• Moran Law Group
• Divorcerate.org