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Bankruptcy and Divorce

Cynthia M. Fox

As anyone who has been married knows, financial difficulties put a lot a stress on a marriage and are often the catalyst for a divorce. For that reason, I've turned to a colleague, T. J. (Tim) Mullin, a highly regarded attorney who specializes in representing individuals wishing to file for bankruptcy.

Not surprisingly, Tim speaks enthusiastically about the benefits of bankruptcy. As Tim sees it, going bankrupt relieves the financial stress and could save your marriage, or at least straighten out your financial house so everyone has a clean slate after the divorce. As Tim proclaims, why put your marriage under such pressure when bankruptcy "can shift the debt burden back on the banks and credit card companies who are in a much better position to handle it"?

I don't know that I would be quite as strong an advocate of bankruptcy as the solution for a troubled marriage as Tim, but I agree that the economic issues have to be addressed directly if the marriage is to survive. In addition to considering bankruptcy, couples should seek expert advice, often available at no charge, on budgeting, credit, and other personal financial matters as well as communicating directly with their creditors to see if a plan of reduced and extended payments can be arranged.

However, if bankruptcy and divorce are both inevitable, T.J. has loads of good advice about how to proceed. He often advises that couples file for bankruptcy while they are still married rather than after the divorce. That's because many individuals only qualify for the most forgiving form of bankruptcy...Chapter 7...as part of a married couple under the new bankruptcy law passed by Congress last October. (Chapter 7 is the most desirable option for most debtors because the greatest amount of debt can be immediately discharged.)

One of the key features of the new law was the introduction of "means testing" as a qualifier for Chapter 7, setting annual income limits based on household size as one determinate of eligibility. For example, a single person household earning more than $36,696 annually might not qualify, yet a 4-person household (husband, wife and two kids) could qualify even with earnings as high $64,376.

In addition, the allocation of payments and debts in a divorce should always consider the possibility that one spouse or the other might file for bankruptcy after the divorce. For example, spousal maintenance payments cannot be discharged (i.e. forgiven) in a bankruptcy while non-specific obligations from one spouse to the other can. As such, if the couple agrees that one spouse will pay the other a lump-sum in lieu of on-going maintenance payments, this debt should still be identified as maintenance so that it cannot be discharged.

Divorcing couples often allocate their joint credit card debts between them. However, if one spouse subsequently declares bankruptcy, they can have the debt they agreed to pay discharged and the credit card company will look to the other spouse to pay the bill. This risk might be mitigated by the divorce agreement stating that the credit card debt is not dischargeable and this agreement is brought to the attention of the bankruptcy court.

Sometimes, one spouse will buy out the other's interest in the house in exchange for payments to be made over time after the divorce. These payments could be discharged in a bankruptcy and the spouse owed the money would be well advised to protect him/herself by requiring the other spouse to provide a deed of trust or some other enforceable instrument as a further guarantee of payment.

Finally, the new bankruptcy law has made child support payments the highest priority debt that must be repaid by anyone seeking bankruptcy protection. This a great leap forward. Under the prior law, paying one's taxes was the first obligation.

For over 25 years Cynthia M. Fox has focused her practice in family law, with a particular emphasis on matters relating to the dissolution of marriage: divorce representation and mediation, child custody and child support. She is a native St. Louis and a graduate of the Washington University School of Law, Class of '73.

Cynthia M. Fox can be contacted by phone at (314)727-4880 or
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