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Bankruptcy and Divorce

Financial distress, failed businesses and poor property investments place enormous stress on a marriage. Therefore, it is not surprising that bankruptcy and divorce often go hand in hand. This article will discuss some important concepts to consider when planning a bankruptcy after a divorce, or prior to a contemplated divorce.

Washington is a community property state.  This means that while individuals are not responsible for any debt that their spouse incurred before or after marriage, they are jointly responsible for debts incurred by either spouse during the course of the marriage.  For example, even if one spouse opens a credit card in his or her name only, both spouses will be responsible for repayment of that debt under community property law.  Community property law does allow for an agreement between two married people stating that all debts are to be treated separately; however, it must be done prior to entering in to the marriage. Note that separate debts can become joint debts if the debt benefits the marriage (the purchase of food, clothing, child care, shelter or necessary household items) or if a creditor considered both spouses’ credit information before making the sale or loan. 

It is important to understand all of the ways in which both spouses can become responsible for a debt. If one spouse opens a joint account with their spouse, they will both become liable for that debt regardless of whether only one spouse ever used the account. Furthermore, anytime one spouse signs an agreement to pay debt, even electronically, both spouses become responsible for the debt.  For example, one spouse can become obligated on a pre-marriage debt if he becomes a joint account holding on his wife’s existing account.  Likewise, consolidating pre and post marriage debt or refinancing the debt together will also obligate both spouses to one spouse’s pre-marriage debt.

Similarly, property that is acquired during the course of the marriage will also generally be considered the joint property of both spouses. However, when property is accompanied by a title document, such as real estate and vehicles, the owner of that piece of property will be indicated on the title document.  For instance, if a car is in the husband’s name, it is considered his separate property.  If a house is in both spouses’ names, the house will be considered joint property, even if one spouse does not contribute towards the mortgage payments.

Many people believe that they can separate themselves from a community debt, or separate joint property, through the Dissolution Agreement. However, the Dissolution Agreement is merely a contract between two ex-spouses and is not binding on creditors. For example, assume both ex-spouses are on title to a piece of property and are co-debtors on the mortgage. In their Dissolution Agreement the husband agrees to stay in the home and pay the mortgage. The wife then deeds the property to her husband. Even though the wife is no longer on title to the property, and even though the husband agreed to pay the mortgage, if he were to default, the wife would be equally responsible and the creditor would have the legal authority to pursue the wife for 100% of the debt.

 These and many other important factors should all be discussed with a bankruptcy attorney for the purposes of pre-bankruptcy planning. I can provide a free 30-minute phone consultation to discuss the very specific issues that arise when contemplating a bankruptcy either after a divorce or while two spouses are considering a divorce.

Please note that these web pages are for information only. They do not constitute legal advice. These pages do not constitute, nor do they create, an attorney-client relationship between the law office of Luce, Kenney & Associates, LLC, or Brittany Cline, Esq. and any receiver.

By | 2017-04-12T23:39:43+00:00 May 14th, 2013|Blog|Comments Off on Bankruptcy and Divorce