bankruptcy and divorce

How Does Bankruptcy Affect an Ex-Spouse After Divorce?

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Finance series

Once your divorce is complete you expect that any financial ties you and your ex-spouse once shared are severed forever.  However, what happens when your ex-spouse defaults on a debt or files for bankruptcy and seeks to discharge debts that belonged to both of you during the marriage?  In marital property states such as Wisconsin, when a debt is incurred during the marriage, it does not matter if the debt is in one spouses name or the other.  Any debt incurred during the marriage is deemed to be a joint debt under marital property laws.   A judgment of divorce separates the debts as to the spouses, but not  as to the creditors.  If a spouse who was assigned a debt under the judgment of divorce defaults on said debt or files for bankruptcy, it is possible that the creditor will seek payment from the other spouse.   Creditors are not part of the divorce process and are not required to follow the terms laid out in the agreement.   So what do you do when a creditor comes after you for a debt that was assigned to your ex-spouse?

If you hired a proactive divorce lawyer, the answer to the problem is clearly laid out in your Judgment of Divorce.  A well thought out Marital Settlement Agreement will have language dealing with this type of situation.   Should a spouse default on a debt, then the Judgment of Divorce should have language which will allow you to seek remedies from your ex-spouse in family court.   Understand, this does not sever the responsibility you have to the creditor, but it will require your ex-spouse to pay you so you can pay the creditor.   Therefore, if a debt is discharged in bankruptcy and the creditor starts collection efforts against the non-bankrupt spouse, the non-bankrupt spouse can go back to family court to obtain an order for the bankrupt spouse to pay the discharged debt.   In Wisconsin, the court will often order maintenance or “spousal support” to assist you in re-paying the debt which was the responsibility of your ex-spouse.  If your divorce decree is silent with regard to this situation, you can file a contempt action against your ex-spouse in hopes of recovering the money you have to pay the creditor.

To further protect ex-spouses, the Bankruptcy Code was modified in 2005 which changed the type of debt that can be discharged.  Under the new law, if your ex-spouse filed a Chapter 7, a debt owed to a spouse that resulted from a Judgment of Divorce or any subsequent court order may not be discharged (i.e. property division, spousal support, child support arrears, payment towards children’s medical bills).

If a Chapter 13 is filed and completed, the rules are different and you must consult with a bankruptcy attorney to determine how your debt is affected.    If you find yourself in this situation where your ex-spouse files for bankruptcy, you may want to consult with a bankruptcy lawyer to confirm the whether your particular debt is dischargeable.

There are also times where as a result of a post-judgment motion the court orders your ex-spouse to pay you an amount of money as a result of a motion for clarification, contempt or reconsideration of the orders.  For instance, a court may order your ex-spouse to reimburse you for expenses related to the sale of a home or other asset, reimbursement for variable costs or even attorney fees.  Your ex-spouse will not be able to discharge these debts in Chapter 7 bankruptcy (the rules may be different for Chapter 13) and he or she will still owe you the debt after the bankruptcy.  It may be necessary to file a motion in family court to ensure your ex-spouse is specifically aware that his or her responsibility still exists.

Should you find yourself in a situation where a creditor is attempting collections from you and the debt is your ex-spouses responsibility under the Judgment of Divorce, contact Nelson, Krueger & Millenbach at 414-258-1644 to schedule a free initial office consultation to discuss your situation and options.

Property Division in a Divorce in Wisconsin

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Wisconsin Property Division FAQ’s

HOW WILL OUR PROPERTY AND DEBTS BE DIVIDED?

The presumption in the State of Wisconsin is that all property and/or debts of the parties will be divided equally. This presumption can be overcome based on the following factors:

(a) The length of the marriage

(b) The property brought to the marriage by each party

(c) Whether one of the parties has substantial assets not subject to division by the court.

(d) The contribution of each party to the marriage, giving appropriate economic value to each party’s contribution in homemaking and child care services (e) The age and physical and emotional health of the parties

(f) The contribution by one party to the education, training or increased earning power of the other

(g) The earning capacity of each party

(h) The desirability of awarding the family home or the right to live therein for a reasonable period to the party having physical placement for the greater period of time.

(i) Maintenance and/or family support orders

(j) Other economic circumstances of each party

(k) The tax consequences to each party

(l) The previous written agreement of the parties

(m) Other relevant factors

The attorneys at Nelson, Krueger & Millenbach LLC will be able to evaluate the facts of your case and advise you as your assets and debts will likely be divided in your divorce action.

WHAT IF MY SPOUSE HAS EVERYTHING IN HIS/HER NAME?

Wisconsin is a marital property state which means that each spouse has a one-half interest in all property and/or debts acquired during the marriage. There are only a few exceptions such as inherited or gifted property. As a result, title, or in whose name an asset or debt is held, is largely irrelevant in the State of Wisconsin.

WHAT IF I HAVE RECEIVED GIFTED OR INHERITED PROPERTY DURING THE MARRIAGE?

Generally, property that is inherited or gifted is not subject to division in a divorce but there are exceptions. How gifted or inherited property is divided depends on what was done with that property after it was received. For example, if you inherit a sum of money and keep it separate from marital property, you will most likely be able to keep that inheritance. However, if you take your inheritance and use it for a down payment on a marital home, the court will most likely consider that marital property and divide it. Sometimes, though, the court will give a party credit for assets brought to the marriage, including inherited or gifted money.

WHAT IF THERE IS A DISPUTE ABOUT THE VALUE OF CERTAIN PROPERTY?

Often times it is necessary to have property appraised to determine a value. The court usually appoints an appraiser or valuator as an expert in those cases and orders that the parties split the cost for that expert. Each party is also entitled to hire their own independent appraiser or valuator as well.

HOW ARE PENSIONS OR RETIREMENT ACCOUNTS DIVIDED?

Again, the presumption in Wisconsin is that all property, including retirement accounts, will be divided equally. For most 401(k)’s, pension plans, retirement accounts or IRA’s, it is necessary to file with the Court a special order called a Qualified Domestic Relations Order (called a “QDRO”) which effectuates a division of those accounts. For some retirement accounts, such as military, state or county pension plans, QDRO’s do not apply and other special orders are required. If these type of retirement benefits exist, a lawyer or accountant is the most qualified person to assist with the division of the same.

Experts can also be hired to value retirement assets such as pensions. The court usually appoints an appraiser or valuator as an expert in those cases and orders that the parties split the cost for that expert. Each party is also entitled to hire their own independent appraiser or valuator as well.

WHAT IF I OWNED PROPERTY BEFORE I WAS MARRIED? CAN MY SPOUSE GET HALF OF THAT?

In Wisconsin, there is no exemption allowed for pre-marital property. All property (and debts) owned by either party becomes marital property at the time of the marriage. Therefore, all property is equally divisible at the time of divorce, except for gifts or inheritances as stated above. However, the court does have discretion to deviate from an equal division of the property based on the factors listed above, one of which is “contributions to the marriage.” This deviation is more likely in short term marriages or where one party brought significant assets into a marriage, but the court must consider all of the circumstances when making this decision.

WILL THE COURT ENFORCE OUR PRE-NUPTIAL AGREEMENT?

Wisconsin law states that a pre-nuptial agreement is binding on the court unless the terms of the agreement are inequitable as to either party and do not follow Wisconsin law. It is important that parties seeking a pre-nuptial agreement seek the assistance of a knowledgeable attorney prior to signing such an agreement.

WHAT IF MY SPOUSE ACCUMULATED A LARGE AMOUNT OF DEBT WITHOUT MY KNOWLEDGE? AM I RESPONSIBLE FOR HALF OF THE DEBT?

Because Wisconsin is a marital property state and the presumption is for an equal division of property and debt, the answer would be yes. Again, there are exceptions. For example, if the debt accumulation was due to a spouse’s addiction, such as gambling, drugs or alcohol (marital waste), the court usually relieves the other party from those liabilities. There are other situations where you may not be responsible for debt acquired solely by the other party. Your attorney at Nelson, Krueger & Millenbach, LLC can review the facts of your situation and advise you as what they believe to be the likely result in your case.

WHAT IF MY SPOUSE DOESN’T PAY DEBT THAT HE/SHE AGREES TO PAY OR THAT THE COURT ORDERS HE/SHE TO PAY?

Unfortunately, creditors are not bound by family court orders. As a result, they may seek payment from you on a debt that your spouse was ordered to pay. The only recourse you would have would be to file a contempt motion with the family court for your spouse’s failure to pay. Most often, the court will order remedies which may include an income assignment to you for any amounts your spouse failed to pay.

WHAT IF MY SPOUSE (EX-SPOUSE) FILES BANKRUPTCY?

If your spouse files bankruptcy, you would be responsible for the entire amount of any debt he/she is discharged from. Typically, however, this only applies to joint debts. If a debt is in one party’s name alone, the creditor doesn’t often seek repayment from a non-debtor spouse although it does happen on occasion. Again, your remedy would be to file a contempt motion in the family court as stated above. A debtor cannot discharge support obligations but may be able to discharge a property settlement payment in certain situations.

WHAT IF I DECIDE AFTER MY DIVORCE THAT THE PROPERTY/DEBT DIVISION WAS UNFAIR AND I WANT TO CHANGE IT?

The court does not have the authority to change a property division order after the date of the final divorce unless a party files a Motion to Reopen and the court grants that motion. The court will only reopen a judgment for very limited reasons such as mistake, fraud, inexcusable neglect, new information or other equitable grounds. A Motion to Reopen must be filed with a one year from the date a discovery is made of a mistake, fraud, inexcusable neglect that occurred in the final divorce. However, please be aware that it is very difficult to reopen a final judgment and such a Motion is very rarely granted.