Filing for bankruptcy can be a difficult decision and one that is influenced by many factors. There are numerous details to consider and one matter than can greatly complicate the bankruptcy process is a divorce. Before you decide to file for bankruptcy before or after a divorce, consider the following.
When you file for bankruptcy, you are required to list all of the debts. Individually held debts can easily be managed and discharged in bankruptcy regardless of your divorce status. However, if you have any debts that are jointly held with an ex-spouse, those debts may be more difficult to have discharged. The reason is simple: if you file for bankruptcy but your ex-spouse does not, the creditors maintain the right to collect the full debt from the ex-spouse on a jointly held debt. This can be problematic for an unsuspecting ex-spouse who is unaware of your bankruptcy protection status and could be held solely responsible for repaying the debt. The best thing to do about jointly held debts is to have the debt liability clearly defined in the divorce agreement.
Some assets may be at risk of liquidation by creditors in a bankruptcy case. If assets were split during the divorce agreement, certain assets may be in possession of the non-filing ex-spouse. Depending on the type of asset, and whether the remaining debt is a secured debt, an ex-spouse may be at risk of having the asset seized when the other spouse files for bankruptcy. It is best to discuss the potential risk to any assets with a bankruptcy attorney before filing for bankruptcy after a divorce.
The Credit Standing
Since some of the debts may be jointly held, even after a divorce, the non-filing ex-spouse may find themselves at risk of credit damage. When the debts are discharged in bankruptcy, the ex-spouse could (a) be held solely responsible for the debt, with limited ability to repay the debt or (b) tagged along with the bankruptcy status, resulting in a negative mark on his or her credit report. To avoid any unwanted effects to the non-filing ex-spouse’s credit report, make sure the credit bureaus are reporting the information correctly by providing the information of the single filer.