Divorcing Into Bankruptcy

Divorce is a major cause of credit related financial problems in the U.S.

Dorothy Allen never saw her breakup coming. By the time her husband left her to live with a younger woman, he’d racked up $50,000 in credit card debt—much of it spent wining, dining and traveling with the other woman.

Because Dorothy and her husband lived in California, a community property state, she found herself liable for all of that the credit card debt—even though she clearly received no benefit from it.

Dorothy’s job as a teacher didn’t bring in enough money to cover the mortgage on the house on a golf course that she and her husband had shared, not to mention the credit card bills and the two car payments (one for her car and one for the car her daughter drove while away at college).

Dorothy lost the house and wound up filing for bankruptcy protection. Meanwhile, even though her daughter had been making the payments on her car, it was repossessed. Under federal bankruptcy laws, you’re only allowed to keep one automobile; both cars had been in Dorothy’s name.

In just a matter of months, the family had gone from upper middle class to desperate.

In Dorothy’s case, the divorce court never had a chance to divide up the couple’s debt. And she and her ex never came to terms about how they would handle it; he simply abandoned his financial obligations when he left her and left the state.

A divorce might have helped her. In most cases, if the divorcing spouses cannot come to terms over how to divide their debt themselves, the courts will do so—at the same time they consider all of the other marital property.

The courts have considerable discretion in these cases. All of the debt may be assigned to one spouse, or some may be assigned to each. In determining who gets how much debt, the courts may look at such factors as:

• each spouse’s income, employment status and future employment prospects;
• each spouse’s spending behavior in the past (especially if one spouse charged most of the credit card debt); and
• each spouse’s contribution to paying off debt.

The court also can take into account the division of assets, such as who gets to keep a retirement plan, a house or a car, when apportioning debt.

Next: Creditors May Not Care