How Does Bankruptcy Affect an Ex-Spouse After Divorce?

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.

What If My Ex-Spouse Doesn’t Pay Debts or Files Bankruptcy?

What if your ex-spouse doesn’t pay the debts he or she was ordered to pay in a divorce?  Or, what happens if he or she files bankruptcy?  Do you have to pay those debts?

Chances are you had some debt when you were divorce such as credit cards, mortgage, etc.  And, some of these debts were likely to have been joint debts.  Your divorce judgment should have allocated these debts and ordered one spouse or the other to pay them.  However, the thing you need to keep in mind is that your divorce judgment is only binding on the two of you – not your creditors.  Your creditors were not a party in your divorce.  Therefore, they don’t have to follow the court’s orders in your divorce judgment.

If your ex-spouse fails to pay debts he or she were ordered to pay, the creditor can still come after you for repayment.  Or, if your spouse files bankruptcy, you are still responsible for these debts as long as your name is still on them.  If you live in a marital property state, such as Wisconsin, you could even be responsible if your name is not on the debt although that doesn’t often happen.  You do have some options, however, to force your spouse to pay these debts.

While you should seek the advice of an attorney to make sure you are as protected as you can be, it is important that your divorce judgment should at least have language included which sets forth your spouse’s obligation to pay or refinance any debt which has your name on it and to not incur additional debt in your name.  It should state that you are “held harmless” from any of these debts.  And, there should be language that states that if you are held liable for any of his or her debts, that you have the right to come back to divorce court to seek reimbursement.  There are also additional provisions which can be included to even further protect you.  Many of the standard forms for final Agreements that are available to people who do not have lawyers do not have this extra language contained in them.

Even in the event of a bankruptcy, this additional language can protect you.  A bankruptcy action discharges the debt and responsibility between your spouse and the creditor.  However, your spouse still has a responsibility to you to pay the debts he or she was ordered to pay in your divorce.  Therefore, the divorce court retains jurisdiction to enforce that obligation if your judgment of divorce grants that authority to the court.

The court has several options available to it providing that the proper language exists in the judgment.  Primarily, the court can order repayment through garnishment or can even order maintenance or alimony to compensate you for any debt you may end up getting stuck with if your ex- fails to pay.  Sometimes the court will even order a lien or the sale of an asset to pay the debt.

If you are concerned about the payment of debts, you should definitely consult with an attorney to make sure the proper language is contained in your divorce judgment to protect you in the event your spouse fails to pay or files bankruptcy.  Even if you feel you cannot afford an attorney, the long term cost to you could be much greater if you get stuck paying debts that your spouse is ordered to pay.

To discuss your concerns about debt in your divorce in Wisconsin, contact our office at 414-258-1644 to scheduled your free initial office consultation or visit our website for more information.