Impact of Bankruptcy
Bankruptcy law is a specialized area with rules that change frequently. Be aware that it's a potential hazard. If your spouse decides to file for bankruptcy during the divorce, you'll need to consult with an attorney who specializes in bankruptcy law if your own lawyer doesn't have this expertise. Do this right away to protect yourself and your assets. A bankruptcy proceeding puts a stay on your divorce proceeding. This means you will not be able to proceed with your divorce until the bankruptcy is resolved. If your spouse discharges the joint credit cards and other debt, the creditors can come after you, and you may need to join in the bankruptcy.
Child support, spousal maintenance, and other obligations “in the nature of support” are not dischargeable in bankruptcy. Be sure to have language in your divorce decree that labels the payment of certain obligations as “additional support.”
If your spouse files for bankruptcy after the divorce, your property settlement may be totally undone. Again, you need to act quickly with the help of a competent bankruptcy lawyer. You'll be unable to collect your property settlement during the automatic stay of the bankruptcy. If the final divorce decree made your spouse responsible for various debts and obligations, they may fall back in your lap. Make sure your settlement agreement and/or divorce decree has language that protects you against this possibility.
Divorce attorneys sometimes overlook this area of law. Most settlement agreements contain provisions that clearly state the financial obligations of each spouse to the other are not dischargeable in bankruptcy. In addition to this protection, the agreement should contain a “hold harmless” and indemnification clause to offer further protection. A hold harmless clause says you will be held harmless from the repayment of a debt. An indemnification provision means that should a creditor come after you from a debt, you can turn around and go after your spouse. What's important to remember about these clauses is that while they do offer some protection, if your spouse has no money to pay the debt, the result is the same. You don't get what you're entitled to.