Understanding Bankruptcy’s Role in Divorce Outcomes

The YouTube video focuses on how bankruptcy and divorce can interact and how it affects a divorce case, and vice-versa. If you are in the divorce process, you should consult with a local bankruptcy attorney to confirm your bankruptcy can proceed. Sometimes, it’s even better to file for bankruptcy first and get divorced after your debts have been discharged. This video discusses the conflicts between bankruptcy and divorce law.

Bankruptcy Law versus Divorce Law

The key concept is that federal bankruptcy law trumps state law, in this case, divorce law. This can cause issues with marital property division, especially debts. For example, maybe both parties are listed on the car loan, however, the court ruled or the divorce agreement might state that Spouse A will keep the car and make payments. There is typically what is known as a “hold harmless clause” which means that Spouse B will not be liable for the car loan, but here is where it gets confusing.

If Spouse A files files for bankruptcy, the debt will be discharged. Now, Spouse B is on the hook for the entire debt. How is this possible if there’s the hold harmless clause and it’s clear that Spouse A was keeping the car and would be responsible for it? Because it goes back to my original statement that federal law is above/trumps state law. A family law judge is state court and loses jurisdiction because the federal court (bankruptcy court) allowed the discharge.

Also, the car loan or any other debt is nothing more than a contract. So it’s a contract between the creditor and the two parties. The family court judge’s ruling DOES NOT alter that original contract. The judge does not have that authority. Unfortunately, that is rarely explained by the divorce lawyers and never explained by the judge.

So when does a hold harmless clause help? Suppose Spouse A turned in the car voluntarily. Spouse B can run to court and argue that Spouse A is liable and should continue making payments on the car. This would actually protect the credits of both parties since the payments continue. In that scenario, the judge would force Spouse A to continue making payments on the car loan, but once Spouse A files for bankruptcy, there’s nothing the family court judge could do.

Because of this, I always want the spouse keeping the debt to refinance it. For the most part, it’s difficult to refinance a car loan because cars lose value quickly, resulting in more being owed on the car than what it’s worth. However, agreements can have clauses requiring applying once a year for a refinance.

With mortgages it can also be complicated because the debt is much higher. Below is another blog post where I discuss this issue regarding mortgages.

• Divorced! You Are Still Liable for the Mortgage

You can see the video below. If you enjoy the video, please feel free to subscribe to my channel. Any comments, post them on my YouTube page.

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.

Need to look for prior blog posts or other categories? Click the links below:

• Bankruptcy
• Your Wallet

Disclaimer: The information posted on this site should be used for informational and educational purposes only. Please note that the information on this site does not substitute legal advice from a local attorney.