One of the most difficult issues to settle in a divorce case is the debt incurred by one or both spouses. In some cases the debt itself is the main reason the parties are in the divorce case.
In the context of a bankruptcy case, joint marital debts that one spouse agreed to pay for the other can be discharged as against the lender or creditor. At the same time, however, the ex-spouse does not lose the right to have the bankruptcy spouse pay his or her joint liability for the debt if that is what is provided in the divorce decree.
A divorce decree in this context will usually contain language that one spouse will “indemnify” (or, hold harmless or innocent) the other party to a joint debt. Since a joint debtor is not discharged by the filing of a solo bankruptcy by the other debtor, the liability of the joint debtor remains fully actionable by the creditor post-discharge. The issue of post-bankruptcy liability for divorce-related debt can be avoided by including language in the divorce decree providing that each party pays his or her own debt.
When a party subsequently files a solo bankruptcy case, the co-debtor will be responsible for his or her own liability for the joint debt, while the debtor who filed the solo bankruptcy case receives a discharge against the creditor. The creditor in this situation can only collect against the spouse who is jointly liable, and who did not receive a bankruptcy discharge on the debt.
Spousal and child support orders cannot be discharged in bankruptcy cases. A party who is behind on child support or spousal support ( “alimony”) file a Chapter 13 case so that arrears can be paid over a time period of between three and five years. The child support or alimony arrears can be paid overtime as part of the reorganization that is the central part of a Chapter 13 bankruptcy filing. This cannot be done under Chapter 7 since Chapter 7 is a liquidation bankruptcy.
A debtor can discharge an obligation to transfer property to an ex-spouse under the divorce decree. The critical issue is whether the order to transfer the property is in the nature of a division of property ( which can be discharged) or in the nature of spousal support ( which cannot be discharged). One thing to look for when analyzing this type of obligation is whether the transfer of property ( or payment of a lump sum of money to the spouse) was ordered in place of ( in lieu of) an order for monthly alimony.