Understanding Bankruptcy’s Role in Divorce Outcomes: A Legal Summary

With over 26 years of experience handling divorce debt and bankruptcy, I explain how federal and state laws clash, especially when divorce and debt overlap, and how bankruptcy affects this scenario. Understanding this legal mix is key to protecting your finances during divorce.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Updated on November 1, 2025.

Key Takeaways:

• The Supremacy Rule: Federal bankruptcy law always takes priority over a state-level divorce decree regarding the discharge of debt.
• The “Hold Harmless” Risk: A “hold harmless” clause in a divorce agreement is generally useless against the original creditor once a spouse files for bankruptcy. It only protects the non-filing spouse against the other spouse in state family court.
• The Professor’s Take: If the creditor sues both spouses, the non-filing spouse’s best remedy (enforcing the judgment payment) still lies in family court—provided the other spouse has not filed for bankruptcy.
• The Solution: The only way to truly secure the non-filing spouse is to mandate that joint debt is refinanced into the name of the retaining spouse before the divorce is final.

The Supremacy of Federal Bankruptcy Law

The main legal issue is that federal bankruptcy law overrides state laws, including divorce rulings. This causes the biggest problems when splitting up property and debts between spouses.

• The Problem: A state court divorce decree may assign a debt (like a car loan or mortgage) solely to Spouse A and include a “hold harmless clause” to protect Spouse B from liability.
• The Conflict: If Spouse A subsequently files for Chapter 7 bankruptcy and the debt is discharged, Spouse B is often left legally liable to the original creditor for the entire debt. The discharge is granted by a federal court, which strips the state family court of jurisdiction over the debt.

As a matter of contract law, the family court judge’s ruling does not have the authority to alter the original contract between the two spouses and the creditor. Unfortunately, this nuance is rarely, if ever, clearly explained to divorcing parties by their family law attorney or the judge.

The Impact of Rising Interest Rates on Divorces and Mortgages

When the “Hold Harmless Clause” Fails and When it Helps

A hold harmless clause is a promise between the two spouses, not a pact with the creditor.

•  Scenario (Bankruptcy): When Spouse A files for bankruptcy, the creditor can’t use the divorce agreement to go after Spouse B. Federal bankruptcy law cancels that part of the deal because federal law supersedes state law.
• Helpful Scenario (Default/No Bankruptcy): If Spouse A defaults on the car loan without filing for bankruptcy, Spouse B can enforce the hold harmless clause in state court. A family law judge could compel Spouse A to continue making payments to protect both parties’ credit. However, as noted, this state court remedy vanishes the moment Spouse A files for bankruptcy.
• Professor’s Take: If the creditor sues both spouses and a judgment is obtained, the state court’s enforcement power still exists, provided Spouse A does not file for bankruptcy.
• In this scenario, Spouse B can return to family court to enforce the hold harmless clause and seek an order for Spouse A to pay the judgment, thereby protecting Spouse B. This remedy disappears only when the federal bankruptcy court steps in.

A Proactive Strategy: Required Refinancing

Based on this legal reality, I consistently advise clients that the divorce agreements should require the spouse retaining a shared debt to refinance it immediately in their name alone.

• Challenges: Refinancing car loans is often difficult because depreciation can result in the loan being underwater, meaning more is owed than the car is worth. This is often referred to as “negative equity.”
• Recommendation: To mitigate risk, divorce agreements should include a clause requiring the responsible spouse to formally apply for a refinance at least annually until the debt is removed from the other spouse’s name. The spouse should apply for the refinance with several lenders.

Because mortgages involve bigger risks, taking action early is key to protecting a client’s financial future during divorce. One issue with divorce agreements and property is quit-claim deeds. You can learn more about this issue in this short video.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

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.

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