Joint Debts and Divorce
A common misconception is that a family court judge can discharge a party from a joint debt obligation during a divorce. That is simply not true. This myth arises from context of the settlement agreement or divorce decree in which one spouse is “assigned” the debt and ordered to pay a joint obligation. In fact, many family court orders contain a “hold harmless” clause that reinforces the debt assignment. Under this clause, if the party fails to pay the debt, he or she is liable to pay any damages incurred by the non-paying party and subject to contempt by the family court. Powerful stuff, right?
But the judge’s order does not affect the original joint contract between a Husband, a Wife, and a Creditor. This is because the Creditor is not a party to the divorce and the judge has no authority to modify the Creditor’s contract. Therefore, if Husband agrees to assume responsibility for the $10,000 joint Visa debt and he does not pay, then Visa can still come after Wife for repayment of the joint debt. Husband may still be liable to Wife because he failed to follow the court’s order, but that has no impact on the Creditor’s ability to collect from the Wife through lawsuit, wage garnishment, bank account seizure, etc.
Joint debt situations after divorce cause havoc on a regular basis. Sometimes the financial strain of new expenses created by two new households causes an inability to pay a creditor. A Wife may take the house for the sake of the children, but can’t afford to live there. A Husband may take all of the joint credit card debt, but suffer a layoff at work. These cases often end in bankruptcy for one or more of the parties.
Many couples can benefit from filing bankruptcy before a divorce is final. In most circumstances property that is owed by a husband and wife receives better protection from creditors than it receives if owned by a single person. Some debts that are ordered by a family court cannot be discharged by the bankruptcy court, so it is better to discharge those debts prior to a family court order. In some cases, if one spouse files bankruptcy and discharges a debt, a family court cannot reassign that debt to the discharged debtor.
Divorce can complicate the legal obligations of a divorcing couple’s finances. If you and your spouse are considering divorce and have significant debt, speak with an experienced bankruptcy attorney and discuss your options before finalizing your divorce.