Unpaid Bills - Divorce & Bankruptcy
	General Rule. Consider options such as bankruptcy or the sale of assets such as real estate in order to pay off debt if you are planning a divorce. Debt is often one of the major reasons for divorce. Plan to eliminate or reduce it before the decree is final. You must consider the bankruptcy option early, since it may be too late to discharge some debt if you wait until after the divorce decree is final. In most cases, the 2005 change in the law requires that a Chapter 7 bankruptcy be filed before a divorce is final to discharge the maximum amount of debt.

For many divorcing couples, their debt is a primary reason for the divorce. Particularly medical debt, home mortgage, credit card debt, vehicle purchase, vehicle lease and purchase loans, other unsecured purchases, and income taxes.

When the separation from one household to two separate households is considered, there is generally a significant shortage of income to pay the increased housing as well as the existing marital debt. And sometimes additional health insurance and day care expenses are incurred.

And some debts which are established in a divorce cannot be later discharged in bankruptcy. So in most cases any bankruptcy should be done before a divorce..

Debt can be reduced by:

1. Selling assets to raise cash to pay the debt;
- Assets can be sold, but income tax must be paid on any gain on the sale

2. Liquidating retirement assets, such as an IRA or 401(k) account to raise cash;
- Although this may be considered, your retirement assets can be kept if debts are discharged in a bankruptcy filing.
- You should avoid liquidating retirement assets if possible.

3. Negotiating with creditors to reduce the debt;

- Generally creditors will not all negotiate, and a later default will result in a much higher interest rate, and a potential inability to later take bankruptcy.

- Because of the 2005 change in bankruptcy law, creditors now are less likely to agree to lower interest rates.

- For most people, this is not a viable alternative (even though the consumer counseling advertisers say differently).

4. Bankruptcy.

- Under the new 2005 law, marital debts which are allocated (assumed or established) in a divorce case are deemed to be Domestic Support Obligations. They cannot later discharged in a Chapter 7 bankruptcy. (But some of them probably can in a Chapter 13 bankruptcy.)
- In other words, bankruptcy should be done to eliminate the debt before the divorce decree is final. If you wait, you can lose.

For many couples who are planning to divorce, bankruptcy may be the only viable option to financial survival. In many cases, bankruptcy allows you to retain all your personal property, and all of your unsecured debt is eliminated.

However, for maximum effectiveness, the bankruptcy should be done before the divorce.

So, in many cases, debt which could be discharged in a bankruptcy which is filed before the divorce, will not be discharged in a bankruptcy which is filed after the divorce.

In other words, do some financial planning in order to reduce or eliminate your debt. Don’t wait until after your divorce to consider bankruptcy, since in many cases marital debt which is allocated in a divorce decree is now (as of October 2005) nondischargeable in bankruptcy.

Also, be aware that any forgiveness of debt is taxable income to you, even though you never receive any money. Unless the forgiveness of debt occurs in bankruptcy or you can prove that you are insolvent at the time of the forgiveness. Accordingly, the IRS requires that a creditor issue a Form 1099-C to you so that the forgiveness of debt is reported as income. Credit card debt reduction and a mortgage deficiency write-off (such as giving a deed in lieu of foreclosure) are prime examples where you may have to pay income tax on the amount of debt forgiveness.

	Example - Mistake as to Divorce and Bankruptcy. If you have financial difficulties and are considering divorce, then you must do some pre-divorce planning. If one or both spouses take bankruptcy after getting divorced, in most cases some or all of the debt which is allocated in the divorce case will not be eliminated (discharged) in bankruptcy. Debts of Husband and Wife: Credit Card: $ 20,000 Car Loans: $ 15,000 Medical Bills: $ 25,000 Home Mortgage(s): $200,000 If Bankruptcy is taken prior to a Divorce: Balance of debt owned: $ 0 (depends on your case) If Bankruptcy is taken after a divorce: Balance of debt owed: $ 60,000 plus mortgage balance (depends on who owed the debt and what the divorce case orders are.) The debts which cannot be discharged in a bankruptcy which follows a divorce depends on who owed the debt and whether the debts were “established” in the divorce case. If a divorce case ordered one spouse to pay a specific debt which he or she was not fully liable for prior to the divorce (and the other spouse not liable at all), then that debt is likely not dischargeable in a later bankruptcy filing. However, if the bankruptcy was done first, then all such debts are discharged (eliminated.)

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