How Your Divorce Decree Might Impact Your Bankruptcy Case
During property division, you and your spouse can agree to take on debts to get a larger share of a marital asset, or you might simply have more debts to divide than assets. Your divorce decree will state which spouse is responsible for which debts. However, creditors aren’t bound by divorce decrees. If the spouse responsible for a community property debt doesn’t pay, the other spouse can still be pursued for payment. If that spouse files bankruptcy to discharge a community debt they were ordered to pay in a divorce, that other spouse could be held liable. That is, unless the divorce decree includes an indemnification clause. An indemnification clause holds the spouse ordered to pay a debt in a divorce decree liable should the other spouse ever be pursued for its repayment. For example, let’s say the spouses bought a third vehicle during their marriage which ended up being out of their budget. The vehicle was eventually repossessed, and the vehicle sold at auction for less than the balance on their loan. This remaining balance, known as a repossession deficiency, is a community property debt. One spouse agrees to pay this debt in the divorce, but later files bankruptcy before paying off the deficiency balance. The auto lender pursues the other spouse for payment. If the divorce decree includes an indemnification clause, the spouse who had to pay can come after their ex for reimbursement.
Bankruptcy as an Option
If you’re considering bankruptcy, your divorce decree is just one of several documents that will be necessary to draft your divorce petition. Child support and spousal support orders will also be necessary for your divorce petition. The trustee may eventually request to see them, so it’s better to have them available when you file rather than scrambling to track down a copy on a trustee deadline. Another reason to have your divorce decree available while drafting your petition is to list your assets. Your bankruptcy petition needs to include a Schedule A/B form that lists every asset you own. Your divorce petition will clearly list which assets you retain ownership of after your divorce.