By Cara O'Neill
Separate Debt, Marital Debt and Divorce
While each spouse remains individually responsible for the debt incurred before the marriage, something known as “separate” debt, both spouses are responsible for the debt incurred during the course of the marriage, regardless of who incurred the debt. This second type of debt is called “marital” debt and is divided between the two spouses.
Filing Bankruptcy Together while Married
Of course, no one wants to start a new life with crushing debt. If the couple qualifies for bankruptcy protection, meaning that their combined income is within bankruptcy guidelines, it is often preferable to file bankruptcy while still married. This approach allows the couple to wipe out both marital and separate debt, such as credit card debt, medical bills, and other consumer debt. The effect of this is to not only alleviate the couple’s debt burden, but it also streamlines the divorce process by significantly minimizing the financial issues left to be decided by the divorce court.
Filing Bankruptcy Separately After Divorce
When the couple’s combined income is too high to qualify for bankruptcy, it is a good idea to assess whether they can each qualify individually after the divorce since the income guidelines are higher for individuals. If they both qualify to file bankruptcy after the divorce, then they can still achieve the same debt relief they would have had they filed bankruptcy together. It becomes trickier, however, if only one spouse is eligible for relief after the divorce.
The problem arises primarily with “joint” debts, or those debts in which both spouses are on the same account and are both liable to the creditor. While the bankruptcy will wipe out the creditor’s ability to collect against the filing spouse, the non-filing spouse will remain liable for the entire amount. Since bankruptcy does not wipe out the effects of a marital agreement, the filing spouse also remains liable to the non-filing spouse for the payment of any and all debts under the agreement, regardless of the bankruptcy. In this case, care should be taken to distribute the debt in a manner that will be beneficial to both spouses while minimizing disputes afterwards.
If one spouse wants to keep the family home, and has the means to do so, then that spouse can refinance the home, pay the other spouse their share of the equity, and keep the home. However, if the home is worth significantly less than what is owed, then there is likely little reason to keep it. When approached like any other business decision, deciding whether or not to let the family home go to foreclosure becomes relatively simple.