Bankruptcy and Divorce

Posted on Feb 22, 2019 by Katie Carter

If you have more debts than assets and you feel like you’re drowning, it may be that divorce shouldn’t be your first thought.
Let’s break it down a little bit. Because, of course, financially, divorce CAN help, especially if there are some issues (like his general extravagance) that you want to get out from under. But what is divided in divorce, and how can it help your overall financial picture?

How are debts divided in divorce?

Typically, debts that were incurred during the marriage are considered a marital liability (just like, say, a retirement account that was contributed to during the marriage would be considered a marital asset) and will be divided between the parties. After all, it’s pretty unreasonable to think that you’d only get a share of the things that had a monetary value and that you wouldn’t take any of the things that had a net cost with you when you go.

Virginia is an equitable distribution state, so we don’t assume a 50/50 distribution, but oftentimes that is what actually happens.

Are there situations in which the debts wouldn’t be divided?

Yes, that sometimes happens. If one party has incurred the debt for a bad purpose – like to support an affair, or to fuel a drug habit – we can go to court and argue that the debt should be attributed more to one party than to another. In the alternative, if he agrees to take on more of the debt himself, we could arrange this in an agreement.

The presumption is, though, that debt incurred during the marriage is marital. If he won’t agree, you’d have to go to court ($$$) and offer evidence and exhibits to demonstrate that the debt should equitably belong to him because of the non-marital purpose for which it was incurred ($$$). You’ll have much less of a chance of success in arguing that it’s non marital if it’s just credit card debt, and the judge can see that groceries, new tires, doctors bills, etc., were paid for on it. That’s kind of the very definition of a marital purpose.

Even if it’s a credit card and the money on it was for things just for him (like new clothes, or something to fund a hobby, like fishing or hunting or, say, antique car restoration), that doesn’t mean that it wasn’t a marital purpose. If he’s been restoring antique cars throughout your marriage and it’s been fine (or maybe you’ve even turned a profit!), then chances are that you’ll have a harder time arguing that THESE expenses, THIS time, were a problem when the others weren’t. But, of course, those are just examples.

What about other marital assets, like the house?

It may also be tempting to think about getting out from under a house. If it’s underwater, though, keep in mind that, to sell it, you may need to actually bring money to close! You probably already know this, but selling a house that is underwater can be a really tricky proposition (especially if it doesn’t appraise well, or if there are a lot of repairs that are needed for a potential buyer to go through with the sale).

Typically, with a house, there are only two options – either one party buys out the other party’s interest (and refinances the home, if it’s jointly owned), or the house will be sold and the proceeds split (or the liability, of course, if money is needed to be brought to closing).

Should we liquidate some assets – like retirement assets – to cover our debts before we split?

Maybe. Some people do that, especially with high interest debt, like pay day loans or credit cards. Some retirement assets, like IRAs, allow you to withdraw a portion tax free. But, of course, you’ll want to talk to a tax advisor and also a financial planner to make sure that doing this will fit into your bigger financial picture.

With very few exceptions (Sheera Herrell in our office being a notable one), most attorneys are not also financial planners. You’ll want to make sure that you’re thinking strategically and making informed decisions based on sound advice. Talk to someone who is an expert in the area before making any big decisions.

But what should I do? I really want to get out from under this marriage.

If you’re in this kind of situation, I definitely recommend that you talk to a bankruptcy attorney first. Most bankruptcy attorneys offer free consultations, and they can give you a good idea whether bankruptcy is the right decision for you.

It may be easier to qualify for a bankruptcy while you’re still married, as there can be strict income requirements that may be harder for you to meet once you’re finally single. Also, you should know, whether you decide to go through bankruptcy now or later (or maybe even not at all), what debts from your divorce might be dischargeable later.

It’s a good idea to at least get the advice – from a divorce attorney, from a tax advisor, from a financial planner, and even from a bankruptcy attorney – to help maximize the benefits of this process. It’s not always easy, and it can take a team of experts, but if you really take the time, do your research, and ask the right questions, you can put yourself in as strong a position as possible moving forward.

For more information or to schedule a consultation with one of our licensed and experienced Virginia divorce and custody attorneys, give our office a call at 757-425-5200.