Bankruptcy and Creditor Issues in Family Law
By: Merielle Enriquez
Financial issues are often the number one stress factor in marital relationships. In difficult economic times a lot of people who would not otherwise have considered bankruptcy are now filing for bankruptcy. Additionally, creditors are aggressively pursuing people in an effort to collect debts. In Nevada, both spouses are generally equally responsible for the debts incurred during the marriage. While a divorce settlement will divide up the assets and liabilities of the former spouses, it is an agreement between the spouses and is not binding to the creditors. Therefore, it is important for family law litigants to be aware of the effect of bankruptcy and creditor issues in family law matters.
Federal law provides that an individual debtor cannot discharge a “domestic support obligation” through bankruptcy. 11 U.S.C. § 523(a)(5). Federal law further provides that a debtor cannot discharge a “debt…to a spouse, former spouse, or child of the debtor…that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record…” 11 U.S.C. § 523(a)(15).
Even with better language in the bankruptcy laws, there are a number of pitfalls family law litigants face when it comes to property and debts. One common problem family law litigants face is that a creditor is not generally bound by the terms of a divorce decree. Suppose a decree provides that one spouse shall pay a particular credit card and that card happens to be in both names. That former spouse stops paying the card and manages to receive a discharge of that credit card debt through bankruptcy. A creditor is still able to pursue the spouse who did not declare bankruptcy. Another common problem is a divorce decree that is silent as to or not specific enough as to who’s obligation it is to pay a particular debt. In this scenario, there is no protection from one former spouse discharging that particular debt through bankruptcy and leaving the other former spouse as the sole target of the creditor.
One thing that is commonly overlooked is that bankruptcy can be an effective way for spouses to clean up the finances and allow one another to move on in life with a relatively clean financial slate. Prior to filing for divorce, spouses can jointly file bankruptcy and discharge a number of the debts that would likely follow both spouses into the future.
While jointly filing for bankruptcy can be a means to clean up the financial liabilities of the ex-spouses, it is important to note that bankruptcy does not discharge all debts. For example, court ordered spousal support or child support payments are not dischargeable by bankruptcy. Therefore, if one ex-spouse files for bankruptcy after the divorce, that ex will still be liable for those spousal and child support payments.
The family law attorneys at Kring & Chung, LLP understand that bankruptcy and creditor matters come into play in family law. The effective family law representation at Kring & Chung focuses on helping clients understand the problems that are out there but also to understand the opportunities.