Debt and Divorce: How You Can Get a Fresh Start

By: Veronica Baxter

You have decided to divorce, but before you finalize the property settlement agreement, make sure you know your rights and responsibilities regarding your debt, your ex’s debt, and your joint debt. Don’t be left holding the bag! 

Here are some facts to take into consideration so you can get a fresh start financially, too.

Marital Debt in a Common Law State

Most states are common law states in which people are only responsible for debts incurred in their name. If you have joint credit cards, mortgage, car loan or lease, or if you co-signed any loans for your spouse, you are liable for that debt.

Any joint debt can be collected in its entirety from either one of you if the other has no assets. Bear that in mind. 

Further, any property settlement agreement can designate who is to pay a joint debt, but if your ex fails to pay, the creditor can collect from you, and your only recourse is to sue your ex.

Marital Debt in a Community Property State

The nine community property states are Alaska (can opt-in), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, any debt incurred by either party during the marriage is owed jointly, and anything purchased by either party during the marriage is owned jointly.

In other words, it doesn’t matter if your name is on the debt or not – you are responsible for debt incurred by either of you while you are married. The good news is, a creditor can only collect half from you in community property states.

Debt incurred by either spouse prior to the marriage is not jointly-owned. 

Creditors Can Levy on Joint Property to Collect a Spouse’s Debt

No matter which state you live in, if your spouse has debt that you are not responsible for, a creditor can seize or levy on your jointly-owned property to collect. For example, if a creditor sues your spouse and gets a money judgment, the creditor can levy joint bank accounts to the extent provided by law. In the alternative, the creditor can file a lien against your jointly-owned real property, and that debt must be paid if you refinance or sell the property.

Bankruptcy and Divorce

Because you are divorcing, you will necessarily have to set up two households. This means more expenses on what is likely the same income, which might mean you can’t afford to repay debt incurred during the marriage if you divorce, and you are considering filing bankruptcy.

Before you can answer the following questions, sit down and divide your debt obligations into the following:

  • My debt

  • My spouse’s debt

  • Our joint debt

And mark which debt is secured (like a mortgage or a car loan) and unsecured. This matters.

Should I File Bankruptcy Jointly or Singly?

If there is any chance you and your spouse can cooperate and file a joint bankruptcy petition, that is most efficient and effective:

  • You save on filing fees and attorney fees.

  • You deal with all of your marital debts as well as your individual debts at once. 

  • Your exemptions are double, meaning you can protect more of your assets from seizure by the Trustee.

Should I File Bankruptcy Before or After the Divorce?

If you and your spouse plan to file a joint bankruptcy petition, you must do so prior to the divorce because only married couples can file jointly. If you plan to file singly that can be done at any time, however, keep in mind that your bankruptcy filing will “stay” or stop any legal proceedings, including your divorce.

Should I File Chapter 7 or Chapter 13 Bankruptcy?

Which type of bankruptcy you file will depend upon what sort of debt you have and what you want to get out of the bankruptcy filing.

If you are behind on a mortgage or car loan and want to keep that house or car, you can cure loan arrears in a Chapter 13 filing. In Chapter 13, you create a three- or five-year plan to repay debt, and at the end of the plan, you are discharged of any unpaid unsecured debts. Chapter 13 also allows you to cure back-owed alimony or child support, government fines or fees, taxes that can’t be discharged, and student loans.

Chapter 7 is for you if one or more of these apply:

  • All you have is unsecured debt. 

  • You need to surrender your real property or your car because you can no longer afford the monthly payments.

  • You can afford to keep your home or car and continue to pay as agreed.

Chapter 7 is a four- to six-month liquidation process during which you disclose your income, expenses, assets, and debts, and if you qualify, your unsecured debt is discharged.

Divorcing and filing a bankruptcy petition are two major life events with both personal and financial ramifications. Be sure to consult with legal professionals in both areas so that you can attain your goals and move on.

Veronica Headshot.png

Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy attorney.

Get your financial questions answered.

Visit the Savvy Ladies Free Financial Helpline. 

Get the Expert Advice You Deserve.