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The Trecherous Waters of Divorce and Bankruptcy

A divorce or legal separation will always be difficult emotionally, however, it can be just as hard, if not worse, financially. Often it is not until the parties begin exchanging income information as part of their divorce action that they realize just how dire their financial situation is. Given that New Mexico is a community property state, each spouse is equally responsible for the debts incurred during a marriage. If those debts are substantial, the divorcing parties may want to consider filing bankruptcy.

Anyone considering bankruptcy should consult an attorney that specializes in bankruptcy to determine whether or not it is in their best interests, or if they even qualify to file. This is especially true when parties are divorcing because the parties need to decide whether or not they want to file a joint bankruptcy before the divorce or pursue other options. For example, the bankruptcy code prohibits individuals with incomes above a certain, state-specific threshold from filing bankruptcy and it limits what assets are exempt, or can be kept by the parties after filing. The intersection between federal bankruptcy laws and New Mexico‘s family law statutes and cases can be tricky to navigate, so parties should be cautious when going down that road.

If parties decide not to file a joint bankruptcy and proceed with their divorce, it is essential that the divorce settlement documents include language that addresses what will happen if one or both spouses decide to file bankruptcy after the divorce.

Spousal support, or alimony, and child support obligations are not dischargeable in bankruptcy, which means that the spouse who owes that money cannot get out of paying it by filing bankruptcy.

However, obligations to pay debts may be dischargeable depending on whether the spouse files a Chapter 7 or Chapter 13 bankruptcy. This becomes problematic if one spouse agrees to assume a community debt as part of a divorce, but then later discharges that debt. If that debt is community, or in both parties‘ names, then a lender may seek to collect the debt from the other spouse. Therefore, divorce settlement documents should include language that clearly identifies the parties‘ intentions when dividing debt. For example, if one party is taking a debt instead of paying spousal or child support, then language should clarify that the debt is in the nature of support to prevent dischargeability.

Of course, no one can predict what exactly will happen after a divorce. Sometimes a spouse has every intention of paying the debts they assume in the divorce, but then they lose a job or suffer some other setback that prevents them from doing so. The best the parties can do is consult with experienced family law and bankruptcy counsel in order to make educated decisions about property and debt division and to properly memorialize those decisions in the final divorce documents.

Collins & Collins, P.C.
Albuquerque Attorneys

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