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Hoge Partners, PLLC
First Trust Centre
Suite 400 South

200 South Fifth Street
Louisville, Kentucky 40202
Fax:  (502) 583-1223
Phone:  (502) 583-2005

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Bankruptcy and Divorce

From U.S. Bankruptcy Court's website:

Bankruptcy laws help people who can no longer pay their creditors get a fresh start – by liquidating assets to pay their debts or by creating a repayment plan. Bankruptcy laws also protect troubled businesses and provide for orderly distributions to business creditors through reorganization or liquidation.

Most cases are filed under the three main chapters of the Bankruptcy Code – Chapter 7, Chapter 11, and Chapter 13.

Federal courts have exclusive jurisdiction over bankruptcy cases.

 

In a number of cases, divorce and bankruptcy are discussed and filed at the same time. In the case where the couple has a large amount of marital debt, a joint bankruptcy petition may be a way to resolve those debts before the divorce process begins.

However, if one party files, the other party may still be responsible for those debts and it may even place joint assets at risk of seizure. This a very important consideration when contemplating divorce. The determination of marital vs. non-marital property is important during both divorce and bankruptcy.

During divorce, Kentucky courts divide marital property between spouses in a way that is fair and just, based on the circumstances, even though this may result in an uneven split.

When it comes to bankruptcy, a debtor must disclose all of his/her property and debts to the bankruptcy trustee. Since a debtor owns marital property with his/her spouse, the debtor must disclose these assets along with his/her separate property. Depending on the type of bankruptcy filed, this may place marital property at risk of seizure.

If the couple chooses not to file a joint petition, the non-filing party can still be protected. There can be an indemnification -- or "hold harmless" --  clause in the marital settlement agreement or divorce decree, which entitles the non-filing spouse to reimbursement for any marital debts the non-filing spouse must pay.  Indemnification clauses can also include language to prohibit one spouse from discharging other divorce obligations in bankruptcy. For example, domestic support obligations, such as child support and alimony, are never dischargeable in bankruptcy.

If a substantial amount of debt is an issue in your divorce, be sure to discuss with your attorney the advisability of filing for bankruptcy (jointly or separately) before your divorce case is initiated.

 

By James K. Murphy, Esq.
Attorney at Hoge Partners, PLLC
02/10/2015