Distribution of Debts Leading to Bankruptcy

During divorce there is more than just an assessment and distribution of assets, especially when a couple has joint debts as well. It is easy enough to assess any debts that belong to only one person, but when both parties contracted for loans or credit cards, it becomes a different topic. Your divorce lawyer can help you with this part of your divorce settlement, but you do want to keep in mind that the debts will not necessarily be divided evenly just because you both happen to be equally responsible for them while you are married. There are many factors that come into the picture before the court makes a decision about distribution of debts. The court may even assign some individual debt to the other party if it feels one party has benefitted more than the other during the divorce (this is more common with credit cards and possibly a car loan that is in one name but the one spouse uses more than the other).

When the court makes a decision about distribution of debt, it weighs several factors into the equation including but not limited to the following:

  • Current salaries and future earning capabilities of each party
  • Which party is more likely to benefit from use of the assigned debt (in other words, if the loan is for a car, who will retain physical ownership)
  • Individual living expenses following divorce
  • Ratio of debt to assets
  • Has the party with individual debt been the only one to benefit from those payments during the marriage?
  • How will the debt assignment affect the financial well being of the children?
  • In the case of an equity loan, who retains physical custody or ownership of the home?

The court may also consider other factors in order to assess the appropriate person to pay for the debts, but these are the more common factors the court uses. Credit cards are likely to be assigned to the person with the highest purchasing power except when it is used in the operation of a business or when one party benefits more than the other. Remember, however, unless you have a mutual agreement the court will make the final decision regarding assumption of debt. It is in your best interest to try to work out a mutual agreement that will keep you from overburdening one another and prevent the combination of divorce and bankruptcy.

Another factor the court considers, especially with credit cards, is the indignant attitude one of the parties takes when divorce is imminent. There is sometimes the urge to go on a spending spree and increase the potential effects of divorce. It is important to maintain control and not attempt to do things that will be a financial burden on the other party even if things are not exactly peachy-peachy—this is true even if there was adultery or cruelty involved. You want to avoid adding divorce and bankruptcy to an already delicate situation, and that means exercising self-control both in and out of the courtroom. Your divorce lawyer can advice you on how to accomplish that difficult task.

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