I regularly have questions about what happens in bankruptcy when part of the debts belong to an ex-spouse by a divorce decree and yet the creditor is still coming after this ex-spouse. Hopefully I can help flesh out the answers and variations in this post.
Unfortunately, divorce is quite common. As part of the typical divorce decree, spouses are responsible 50-50 for a number of debts and other debts are assigned solely to one of the spouses. Most credit cards and such are 50-50, but when a spouse gets a vehicle or the home, the associated debt goes along with the asset. Some alimony might be given to offset that debt, or credit card and other debts assigned to the non-asset possessing ex-spouse.
In the end, creditors do not care much about whose responsibility it is to pay a debt. If ex-husband and ex-wife are on the mortgage and the mortgage is not being paid, then the mortgage company goes after both. If the now divorced spouses fight the debt in court, then the court will remove the one that the divorce decree removed from the debt. But it can be expensive to go to court to fight a mortgage company, usually between $1,000 to $5,000 depending on the attorney and lawsuit.
More commonly, the issue is on credit cards. The credit card has not been paid and now the credit card is suing both of the ex-spouses to recover on their debt. Again, it can be expensive to get an attorney who will represent you at Court and have the divorce decree entered and the decision removing the one spouse. These lawsuits usually run between $500 to $3,000.
Most lawsuits by credit card or mortgage companies go to default, meaning the former spouses do not do anything. So now the two are dealing with a garnishment or other means of collections by the credit card or mortgage company.
Now the party who is not supposed to have the debt has to get a Court to hold the other spouse in contempt for failure to pay the debt that was awarded to them. This can be just as expensive as fighting the original lawsuit before, somewhere between $1,000 to $5,000. Contempt on a divorce decree grinds slowly through the system and can take months to finally end.
Since there are also other debts and issues that needs resolved, bankruptcy is often considered as a possibility. The typical Chapter 7 Bankruptcy costs between $800 to $2,500 (our rates can be viewed here) and is usually easier and cheaper than fighting in court over a debt or seeking a contempt action. Further, this helps give the ex-spouse a fresh start from all the divorce debts that may yet seek to come after them.
A few pitfalls of a bankruptcy do exist in which you should be aware. If a debt was awarded to both ex-spouses to be paid 50% then a strange scenario comes into play. Filing the bankruptcy effectively removes any legal liability for the debt to the creditor. While both spouses were technically on the line for the full amount, the decree only required 50%. The ex-spouse who has not filed bankruptcy is still on the hook for the full amount and can come after the bankruptcy ex-spouse for contempt of the divorce decree. Meaning, you can be discharged of your obligation to pay the creditor, but the ex-spouse can take you to court and you will be obligated to pay that ex-spouse the 50% amount or suffer contempt. Bankruptcy does not discharge domestic support obligations and a 50% award to a spouse on a debt is not dischargeable even though you no longer owe the creditor due to the bankruptcy.
Now, having said that, most ex-spouses do not go after the bankruptcy-filing ex-spouse, but you should be aware that you may still be obligated to pay your 50%.
Bankruptcy is a less-expensive alternative to dealing with all the post-marital debts, but there may be the pitfalls you should be aware.