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  • July 30, 2014

Legal Corner: Divorce & Bankruptcy - Ladue News: Business & Wealth

Legal Corner: Divorce & Bankruptcy

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Posted: Thursday, January 23, 2014 12:00 pm

Getting a divorce is complicated enough, but when combined with mountainous debt, the process can become even trickier. Area attorneys discuss the connection between divorce and the likelihood of bankruptcy—and the additional problems such a situation can cause.

“Ideally, [divorce and bankruptcy are] not connected,” says Cary Mogerman of Zerman Mogerman. “If they are, then the people involved have problems that go far beyond the divorce. But sometimes, family problems can be the result of interpersonal dysfunctions that cause both of these things to occur. I think financial pressure is frequently a cause for marital discord, so sometimes one seeps into the other.”

While bankruptcy is—in the simplest terms—a way to alleviate debt, there are regulations regarding what financial obligations can be lifted. “When the bankruptcy laws changed in 2005, there was a section added to the bankruptcy code that states if you file a Chapter 7 liquidation, you cannot discharge any debts you were ordered to pay in the divorce decree,” says Kimber Baro of Bublitz & Baro. “When I see someone who has been divorced, and the divorce decree orders them to pay their ex-spouse any money, I tell them it was not be dischargeable in a Chapter 7. Under that scenario, that client has to file a Chapter 13 bankruptcy, because this special provision doesn't apply, and you can still get rid of divorce decree debt.”

Additionally, things continue to escalate when dealing with joint debt. “Divorce attorneys write up [something like], There’s a joint Discover credit card and husband will pay it. Well, 'Discover Card' was not sitting in that courtroom—that is not binding on them whatsoever,” Baro says. “If it was a joint account before divorce, it remains a joint account after divorce as far as that creditor is concerned. If the divorce decree says the husband is going to pay the joint debt, and husband then afterwards files for bankruptcy, there’s some question as to whether he can get rid of that, because the divorce decree didn’t say he has to pay that money to [his former] wife.” In that example, she says the wife would need to file a compliant explaining that the debt was relieved from her in the divorce.

This is exactly what one wife did, according to Kirk Stange of Stange Law Firm. He cites the Missouri Court of Appeals decision in the case of Henderson v. Henderson, in which the husband filed for bankruptcy after being allocated the joint debt during a divorce. The creditors turned to the former wife for repayment; and in this case, the court determined that the husband could not erase the debt via bankruptcy after agreeing to repay.

Mogerman explains that, when possible, it can be helpful for both parties, pre-divorce, to “be on the same page about what they're going to do about this debt. It can be very helpful, in many cases, if they can agree to conclude the bankruptcy in advance of concluding the divorce… so the parties emerge with a clean slate.”

Those looking to protect themselves are advised by Joseph Lambson of Hais, Hais, Goldberger, & Lambson not just to keep an eye on any debt, but to monitor their credit report. “If you’re in a relationship where one of the spouses has a spending problem, don’t take out a joint card,” he says, noting the importance of making sure your spouse is not signing your name on credit card applications.

“The trick is not to wait until it gets so unmanageable that by the time you get to divorce court, there’s no effective way to deal with the mountain of debt short of bankruptcy,” Lambson says.

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