How Bankruptcy Influences Divorce Settlements

Divorce is a complex process, and bankruptcy is as well, since two different areas of law are at play. The situation becomes even more complex when these two significant life events collide. The financial implications of divorce can be substantial, often resulting in increased debt. Too much debt listed on a credit report will not only affect a divorce but could also result in bankruptcy options. Understanding the connection between divorce, debt, credit reports, and bankruptcy is crucial for individuals navigating these challenging times.

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This blog post dives into the surprising ways bankruptcy law can impact your divorce. Learn how bankruptcy trumps state law, the consequences for the “innocent” spouse, and smart strategies to protect yourself during a divorce involving shared debt.

Key Points:

• Bankruptcy law is strictly a federal right.
• Listing in a marital settlement agreement that one party is solely responsible for a marital debt doesn’t mean that the debt can’t get wiped out in bankruptcy.
• Review your free credit report every 12 months to look for errors.
• The three major credit bureaus are Equifax, Experian, and TransUnion.

Chapter 7, in Title 11 of the U.S. Bankruptcy Code, is the most common type of bankruptcy filed, followed by Chapter 13. When a debtor declares bankruptcy, whether Chapter 7 or 13, most, if not all, of their debts are wiped out. But what happens if a debtor files bankruptcy and it’s tied to a divorce case?

The Issue of Marital Debt and Divorce

It’s common for married couples to be listed on debt together as co-signers or co-borrowers. For example, both parties are listed on a car loan or mortgage. So when it’s time for the divorce to be finalized, assets and debts are assigned to either one party or both. In this example, let’s pretend there are two cars. Spouse 1 drives a Toyota, and Spouse 2 drives a Honda.

The Toyota has Spouse 1 and 2 listed on the car loan, while the Honda only has Spouse 2. At divorce, the parties agree they will keep the car they have been driving throughout the marriage. This is reflected in their marital settlement agreement, and it’s clear that each party is responsible for the debt associated with their car. Below is an example of the wording in my marital settlement agreements.

1. Spouse 1 has a 2023 Toyota Camry, which shall remain in Spouse 1’s sole, exclusive use and ownership.
2. Spouse 2 has a 2020 Honda Accord, which shall remain in Spouse 2’s sole, exclusive use and ownership.
3. Each party shall be responsible for any monthly payment, expenses, maintenance, insurance, or care of their respective vehicle and shall hold the other party harmless from any liability.
4. Each party shall execute any documents necessary to transfer sole ownership of said vehicle to the other party.

In subparagraphs a and b, it’s clear that each party should keep their car, and in subparagraph c, it’s clear that each party is responsible for their vehicle, including maintenance costs, insurance, expenses, and the monthly payment. Subparagraph d applies when either car is sold in the future.

Suppose Spouse 1 loses his job and can no longer afford to pay the car loan. Because Spouse 1 is not working, he doesn’t qualify for Chapter 13, which would help him keep his car. Spouse 2 regularly reviews her credit report and has already received notice that the payments on the car loan were late. Spouse 1, having no choice, files for Chapter 7 bankruptcy and tells Spouse 2 that now that he has been declared bankrupt, he is no longer responsible for the car payment. The lender has already taken back the car with a voluntary repossession.

Spouse 2 rereads the marital settlement agreement, which clearly states that each party is responsible for the car payments. So why is the lender calling Spouse 2 to collect and threatening to file a lawsuit against her when the agreement is clear that it’s the former spouse’s responsibility?

The Confusion Between Bankruptcy Law and Divorce Law

Bankruptcy is exclusively a federal right. No such right exists in state law. This is separate from state exemptions allowed in bankruptcy under the Bankruptcy Code. Under the Bankruptcy Code, states can accept federal exemptions or opt out and use state exemptions. Remember, each state is different when it comes to exemptions.

Because bankruptcy is federal law, it trumps state law. This means that federal law is the supreme law of the land. Just think of the US [Supreme] Court. Because federal law is above state law, a state law cannot conflict with federal law. While states can have their own laws, those laws cannot conflict with federal law. From there, go on down the line.

A county can pass its own laws, but not conflict with state law. A city or municipality can also pass its laws if they don’t conflict with county or state law.

“This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any thing in the Constitution or Laws of any State to the Contrary notwithstanding.”

Article VI, Clause II of the U.S. Constitution.

A Short Lesson on Contract Law

Now that we have reviewed what is known as the supremacy clause of the U.S. Constitution, where federal laws are supreme to state law, let’s review contract law.

When both spouses signed the car loan for the Toyota, that car loan was nothing more than a contract. That contract included three parties: the lender and both spouses. If payments stop on the car loan, the lender can sue all the parties to the contract. In this case, both spouses. However, in this case, Spouse 1 filed for bankruptcy, and per federal law, Spouse 1 is no longer responsible for that debt. That leaves Spouse 2.

The Consequences of Bankruptcy in a Divorce Case

Now, Spouse 2 is legally responsible for the car loan. Remember, even though there was an agreement where each party kept their car and was responsible for the debt attached to it, bankruptcy would eliminate that obligation because federal law supersedes state law. In this case, the contract or marital settlement agreement was in family court, which is state court. There is no federal family law court system.

Back to contract law, when that marital settlement agreement was signed, it was signed between both spouses, not the lender. That marital settlement agreement would not undo the contract with the bank. This is even though the divorce agreement states that each party shall hold the other harmless.

The only way Spouse 2 could eliminate 100% responsibility for the car loan on the Toyota is by having Spouse 1 refinance the loan solely in his name. The catch? Cars lose value so quickly, known as the depreciation value, that chances are there is negative equity on the vehicle, meaning more money is owed on the car than what it is worth.

How to Protect Yourself in Case of Divorce Debt

Unfortunately, as you can see in the above examples, even if there is an agreement on marital debt, such as a car loan, it may not be enough to protect a spouse if the debt is titled in both names. In turn, this could affect the innocent spouse’s credit, result in a lawsuit, and then collection actions such as wage garnishments begin, forcing that spouse to either pay back the debt or file for bankruptcy.

If a refinance is possible, that definitely should be written into the agreement. Now, while we did discuss the depreciation value on vehicles, at some point, there will be equity in the car, allowing for a refinance. So, a divorce agreement could reflect that a refinance is attempted in the future.

Because these issues are common, it is recommended that debtors review their credit reports regularly. The three main credit reporting bureaus are Equifax, Experian, and TransUnion. Under the Fair Credit Reporting Act (FCRA), you are entitled to free copies of your credit report once every 12 months. A good source is annualcreditreport.com, which will provide access to all three credit reports.

I hope this helps you better understand how bankruptcy law affects divorce decrees.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. For paralegals and students buying single copies, you can do so via Amazon books. To access my YouTube channel, click this link.

Additional blog content is available below or by using the search bar at the top of this page:

• Bankruptcy
• Your Wallet

Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.

Updated December 29, 2024.

September 6, 2025.