Divorce does more than just separate spouses; it creates a financial strain on the parties that can leave them filing for bankruptcy. As a bankruptcy paralegal, I have seen many divorced individuals in our office. After dealing with the emotions associated with divorce, they are left to deal with the financial strain of surviving on one income. Often, people use credit to make up the other income or they simply are too depressed to take care of their personal finances. Whatever the case, divorce affects your personal finances and if your ex-spouse files for bankruptcy relief, you should be aware of the implications to your personal finances.
Child support and alimony – Bankruptcy does not discharge child support and alimony; however, you may need to file a proof of claim. If your ex-spouse files for bankruptcy relief, immediately contact your family court attorney and a qualified bankruptcy attorney to determine how this will impact you.
Joint assets – If you hold title jointly with your ex-spouse, his or her bankruptcy case could put those assets in jeopardy. This was more of an issue several years ago prior to the Bankruptcy Reform Act; however, in some cases you may still be in jeopardy. Ask your family court attorney to make sure there is language in your settlement agreement and divorce decree that will protect you in the even of the filing of a bankruptcy by your ex-spouse.
Joint debt – Very similar to joint assets, being a co-debtor with your ex-spouse can ruin your credit if they file bankruptcy. If your ex-spouse defaults on a loan and you are a co-debtor, the creditor will look to you for payment. If you do not pay the debt, the creditor could pursue legal action to collect the debt from you. Some family court attorneys have learned to insert language that offers some protection; however, it is very difficult. If you suspect that your spouse may default on joint debt, have your family court attorney consult with an experienced bankruptcy attorney before drafting a final agreement.
Life insurance, pension and retirement – Most states and the federal bankruptcy codes have exemptions for these types of assets that protect them fully, or partially, from being levied by creditors in a bankruptcy. However, if you are entitled to a portion of these assets according to the divorce decree, it may be better to liquidate the asset and divide it at the time of the divorce. This may be even more important if your ex-spouse is irresponsible with his or her personal finances. Seek the advice of your family court attorney and a bankruptcy attorney to make sure you will be protected in the event of your ex filing a bankruptcy.
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