Often times, in a divorce settlement, one party will agree to take responsibility for a particular debt that was incurred in both of the spouses names. If that party subsequently declares bankruptcy, it can result in a confusing situation.
A divorce decree regulates the relationship between two parties who were formerly married. The divorce agreement has no control over a third party creditor to whom a debt is owed unless they participated in the negotiations. If a joint debt is made the responsibility of one party, and that party defaults, whether through bankruptcy or by simply failing to make payments, the other spouse may be held liable for the full amount of the debt and interest, even if the divorce decree says he or she should not be held responsible. Besides the value of the debt, this will affect the innocent spouse’s credit.
If a person finds out that his or her former spouse is attempting to discharge a debt through bankruptcy, that was designated as his or her responsibility via a divorce decree, the innocent spouse can address the issue in a number of ways. Defaulting on the loan is a violation of the divorce agreement and grounds to bring the defaulting party back to family court to explain why the default occurred. The family court has broad discretion to resolve the issue and may modify the divorce decree in order to make sure the debt gets paid without great injustice to either party. The court may allow the innocent spouse to take on the debt, provided that the defaulting party makes regular payments to compensate him or her. Unfortunately, even if the court finds in favor of the innocent party, there is no guarantee that the defaulting party will make payments as required by the Court.
The issue may also be resolved in bankruptcy court. If the second spouse also files for bankruptcy protection, the loan in question may be discharged from his or her credit as well. This method will affect the second spouse’s credit but might be worth looking into depending upon the size of the debt in question. The spouse may also petition the bankruptcy court to prevent the debt from being discharged if the bankruptcy proceedings are still pending.