Article provided by Engel Law Group. Please visit our Web site at www.engelatlaw.com.
The current recession is complicating everything, including divorce. Spouses who are hurting financially cannot simply walk-away from their debt when they walk-away from the marriage. This, however, does not mean that divorce is not possible in a bad economy, but just that couples need to take extra care when considering their options, including how to handle their debt.
The Financial Impact of a Divorce
The true financial impact of a divorce is often underestimated because people become focused solely on getting out of a bad situation, whatever the costs. But the problem is that without sound planning and an honest assessment of your finances, a bad situation could become much worse once you are single.
Divorce is expensive in more ways than one. In addition to the great emotional strain and hardship that accompanies a divorce, there are significant financial costs, including:
- Alimony
- Child support
- Property and asset division
- Debt division
- Attorney fees
- Filing fees and other court costs
Washington is a community property state. This means that all of the property accumulated by the spouses during the marriage generally is considered community property and is subject to equal division between the spouses. Conversely, property acquired prior to the marriage generally is considered separate property and is not subject to division.
Examples of common types of community property include the family home and other residential property, wages and other earnings, savings accounts, retirement accounts, stocks, bonds and the cash value of life insurance policies.
Perhaps more significantly in the current economy, community property also includes the debt incurred during the course of the marriage. This can include mortgages, car loans, home improvement loans, business loans and credit card debt. With many spouses behind on their house payments or upside down in their mortgages, it is a real possibility that divorcing couples will have more debt than any other type of community property.
Bankruptcy and Divorce
Bankruptcy may be one of the best options for spouses who want to get a divorce but have a heavy debt load. While bankruptcy can be filed before, during or after a divorce, it is in most couples' best interests to file bankruptcy prior to filing for divorce.
There are several advantages to filing bankruptcy first, including the cost. It is cheaper for spouses to file jointly while they still are married instead of filing singly during the divorce or after it. It also can help simplify the divorce process and make it less painful. By filing for bankruptcy first, couples may be able to eliminate most if not all of their consumer debt. In turn, this will decrease the amount of debt that must be divided during the divorce and make it that much easier to identify any remaining debts that must be paid by one or both of the spouses after the divorce.
However, filing for bankruptcy before divorce will not be practical or even desirable in all cases. Sometimes spouses may not be able to be in the same room together, let alone work together on a joint bankruptcy filing. In these cases, bankruptcy can be filed at the same time as the divorce or after it has been finalized.
Those who seek to file bankruptcy after the divorce should keep in mind that not all types of debt are dischargeable, including:
- Support obligations, including child support and alimony/spousal maintenance
- Student loan debt
- Unpaid income taxes
- Criminal penalties and fines
Additionally, it can be difficult to discharge certain property settlement debts. Federal bankruptcy law prohibits these debts from being discharged in a Chapter 7 bankruptcy, but they may be discharged in a Chapter 13 bankruptcy. However, if the court finds that the property settlement is actually a support obligation, then the debt cannot be discharged even in a Chapter 13 filing.
Protecting Your Separate Future
In some cases, ex-spouses may decide not to repay the debts they have been ordered to pay as part of the property settlement. If these debts were joint debts, then the creditor has the right to seek payment from the other spouse for the unpaid amounts. This can create a financial nightmare for the spouse who believed his or her financial obligations to the creditor ended once the property settlement order went into effect.
There are ways that soon-to-be-ex-spouses can protect themselves from such a scenario. For example, they can take out a levy on property owned by the other spouse to ensure payment of a debt. If the spouse fails to pay the debt, then the property can be sold to satisfy the debt. Additionally, property settlements also can be structured as support obligations, which will prevent an ex-spouse from trying to discharge the debt in bankruptcy.
Conclusion
In the current economy, filing for a divorce can be complicated by the amount of debt shared between spouses. However, even this complication can be overcome with proper planning. An experienced divorce attorney can help spouses come to terms with the financial difficulties posed by their debt load and what it will mean once the divorce is finalized. For some couples, filing for bankruptcy prior to the divorce may be the best solution to managing their debt.
