The Economic Impact of a Divorce
An important consideration for those contemplating divorce is the economic ramifications of that decision, particularly if the couple has a large amount of debt.

August 11, 2009 /24-7PressRelease/ -- The Economic Impact of a Divorce

Article provided by Erik B. Jensen, P.C.
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An important consideration for those contemplating divorce is the economic ramifications of that decision, particularly if the couple has a large amount of debt. Without taking the necessary steps to protect one's interests, debt from a marriage -- even a marriage that ended years ago -- could come back to hurt both pocketbooks and credit scores.

Pennsylvania is an equitable distribution state, which means the courts will divide and distribute property from the marriage in a way they deem fair. This includes the division and distribution of any debt incurred during the marriage. If the spouses have significant joint debt, it may be in their best interests to take steps to decrease as much of the debt as possible prior to filing for divorce.

Erasing Debts through Bankruptcy

How can couples decrease their debt? One option is to file for bankruptcy. The spouses can file jointly or separately, but if they have considerable joint debt -- like credit cards, car loans or medical bills -- it may be more efficient and cost effective to file jointly.

Depending on the couple's financial situation, they may be eligible to file a Chapter 7 or Chapter 13 bankruptcy. In the case of an impending divorce, Chapter 7 may be preferable since it will wipe out most, if not all, of the couple's consumer debt, giving each of them a fresh start. In a Chapter 7 bankruptcy, the court will appoint a trustee to determine the extent of the couple's assets and debts. If the couple owns any nonexempt property -- such as additional vehicles, vacation homes or family heirlooms -- the trustee may sell the property to satisfy some of their debts. Most people filing for Chapter 7 only own nonexempt property and will not have to forfeit any of their assets. Nonexempt property includes the family home up to a certain value, the family vehicle and reasonably necessary clothing, household items and furnishings, among other items.

Chapter 13 bankruptcy involves a restructuring of the couple's debt into a 3-5 year repayment plan, which may not be feasible or advisable for a couple considering divorce. Chapter 13 bankruptcies, however, can allow couples to roll missed mortgage payments into the repayment plan and avoid foreclosure on their home.

Not all types of debt can be discharged in bankruptcy. Back taxes and student loans, for example, may be included in the property settlement and will have to be repaid.

If the spouses do not file for bankruptcy before divorce, there is nothing to prevent either party from filing after the divorce is complete. Even though the bankruptcy would be filed after the parties were already divorced, a former spouse's separate filing still could have a significant impact on the ex-husband or ex-wife. Depending on how the property settlement was structured in the divorce order, a former spouse filing for bankruptcy could attempt to have some the debts discharged for which he or she is responsible under the property settlement.

Generally, a former spouse will not be able to have alimony, child support or any other support obligations discharged by a later bankruptcy filing. Other types of debt that are not considered support obligations by the court, however, may be included in the bankruptcy.

There are ways to structure property settlements that may help protect against an ex-spouse's future bankruptcy, including property liens and indemnity clauses. An experienced family law attorney can help you devise the best possible settlement to protect your financial interests.

Joint Debt

If the divorcing parties do not file for bankruptcy and have joint debt at the time of the divorce, the court will determine how to fairly divide the debt between the two parties. The court may order both parties to pay a certain percentage of the total debt or the court may order one party to pay some of the debts in full and assign the other party to pay the remaining debts. In some situations, the court may even order one party to pay all of the debt in full.

Even if the court assigns one party to pay off all of a jointly-held debt, however, this does not mean the other party is no longer legally responsible for the debt. Creditors do not have to recognize the court's property distribution order. This means that if the former husband is required to pay off a jointly-held credit card but fails to do so, the credit card company has the legal right to seek payment from the former wife. If the former wife fails to make the payments, her credit score could take a hit.

Conclusion

Not all couples will be able to work together prior to the divorce to reduce or eliminate their joint debt. This is why it is important to work with a family law attorney who can guide you through the potential economic impact of your divorce.

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