"Bankruptcy-Proofing" Your Minnesota Divorce

Financial problems and divorce often go together. When debt and other money problems contribute to a divorce, it's important for people to know how to protect themselves in the event that an ex-spouse files for bankruptcy protection.

The two most common types of consumer bankruptcy are Chapter 7, in which assets may be liquidated to pay off debts, and Chapter 13, in which employed debtors agree to pay back all or part of their debt on a schedule from future earnings. Many types of debt, including medical bills, credit card bills, and utilities can be discharged (wiped out) in bankruptcy. However, "domestic support obligations" are non-dischargeable in bankruptcy, as is any 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, or a determination made in accordance with State or territorial law by a governmental unit.

If You Expect Your Ex to File For Bankruptcy

The good news, as noted above, is that most debts incurred to a former spouse in the course of a divorce are not dischargeable in bankruptcy. However, there are still things that you can do to help to safeguard your interests.

If it is possible to negotiate receiving a greater amount of spousal support or child support, rather than a greater share of property, that is usually preferable. Under some circumstances, a property division may be able to be discharged in bankruptcy.

If the terms of your divorce include your soon-to-be-ex paying some or all of your attorney fees, you will want to be sure the divorce decree is exceedingly clear in this regard. Language in the decree should specify that your spouse owes reimbursement to you for attorney fees you incurred as part of your divorce. A debt your ex owes to your lawyer may be considered dischargeable. A debt to you, especially if it is in the nature of support because you cannot afford your own attorney fees, is much less likely to be discharged.

A settlement agreement should specify that any financial obligation your spouse has to you, whether it be for maintenance, attorney fees, or mortgage payments on the home in which you continue to live, is either support or a divorce debt. Regardless of what an obligation is called in a Minnesota divorce decree, a federal bankruptcy court must examine the substance of an obligation to determine if it truly meets the criteria for non-dischargeability. However, using the right language is helpful.

It is always advisable to include in a divorce decree a bankruptcy clause specifying the consequences if one party fails to make payment to the other on a debt, or to deliver property, as provided for in the divorce decree. A bankruptcy clause can specify that the parties intend that such obligations not be dischargeable in bankruptcy. Remember, however, if you are the one who may need to file for bankruptcy, such a clause will bind you the same way it would bind your spouse.

Many divorce decrees also include hold-harmless agreements between spouses. Essentially, if your spouse is made responsible in the divorce decree for a joint marital debt, he or she may have responsibility for that debt discharged in bankruptcy. However, the party to whom the debt is owed can still pursue the joint debtor: you. The hold-harmless agreement requires your spouse to reimburse you for any money you pay on this debt. Depending on which chapter of bankruptcy he or she seeks protection under, however, it's possible this requirement may be discharged.

Bloomington Divorce and Support Attorneys

If financial problems are complicating your marriage, they will also complicate your divorce. If you are concerned that your spouse might file for bankruptcy after your divorce (or are worried about your own financial future), you need an experienced Minnesota divorce attorney. We invite you to contact Bloch and Whitehouse, P.A. at (952) 224-9977 to schedule a free initial consultation. We look forward to working with you.