Going through a divorce can be emotionally and financially painful. And if your ex-spouse files for bankruptcy, it may become an even greater stress because it can negatively affect your financial stability. Divorce and bankruptcy can have an impact your financial situation in different ways, depending on your ex-spouse’s new circumstances.
Bankruptcy allows debtors (individuals or businesses) who owe creditors more money than they can afford to pay to manage their debt in an orderly fashion through court intervention. Individual debtors can file for bankruptcy under Chapter 13 or Chapter 7 of the Bankruptcy Code. The U.S. Courts website explains that Chapter 13 bankruptcy is a repayment plan of debts over a period, and that Chapter 7 bankruptcy eliminates—or discharges—most or all of the bills. Once the debtor files for bankruptcy, creditors are ordered to stop all collection activity, which is called an automatic stay.
Here are three things to consider when going through a divorce and bankruptcy, including what you should do to protect yourself and your financial stability.
If your ex-spouse files for bankruptcy, you will be responsible for the debt if you are a joint owner or cosigner. The lender can require you, as a joint owner or cosigner, to make payments on a loan if your ex-spouse declares bankruptcy on the credit.
“Unfortunately, the creditors don’t care what your divorce agreement stated,” says Justin Harelik of Bankrate.com. “You are still responsible to pay on this debt even if your [ex-spouse] fails to pay. The divorce agreement does not wipe out your responsibility to pay, only that you can force another person to do so.”
Be prepared to pay the loan in the event that your ex-spouse stops paying or is discharged from the obligation to pay the debt through the bankruptcy. Contact your divorce attorney to discuss your legal options.
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, alimony and child support payments must be paid before all other creditors, including taxes. Even though alimony is not dischargeable, this doesn’t mean you will continue to receive the same amount you did before your ex filed for bankruptcy. In most states, alimony obligations can be modified if the ex-spouse submits a request to the bankruptcy court. The bankruptcy court may determine a new amount or establish an agreement with you based on your ex-spouse’s petition.
There are some rare circumstances in which alimony can be discharged, so be safe and contact your divorce lawyer to ensure your alimony or support payments are protected.
Your credit may not be directly affected by your ex-spouse’s bankruptcy filing because your credit score is separate and distinct from your ex-spouse. However, if your ex-spouse was discharged from the obligation of a joint-owned or cosigned debt, the creditor has the right to demand payment from you. If you don’t pay the debt, then your credit could be negatively affected.
In rare cases, the creditor may inadvertently notate the filed bankruptcy on the non-filing spouse’s credit report. If the bankruptcy notation is on your credit report, dispute the notation with the credit reporting agencies, Trans Union, Equifax, and Experian. If your ex-spouse files for bankruptcy, it is recommended that you review your credit report for errors six to nine months after they filed.
Addressing these three things will help you be proactive in protecting your financial stability.
Consumer Education Services, Inc. (CESI) is a non-profit committed to empowering and inspiring consumers nationwide to make wise financial decisions and live debt free. Speak with a certified counselor for a free debt analysis today
Consumer Education Services, Inc. (CESI) is a non-profit service provider of comprehensive personal financial education and solutions for all life stages and for all of life’s milestones. Our goal is enhanced economic security for everyone we serve.
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