What happens when you agree to pay the debt of your ex-wife or ex-husband as part of your divorce decree? What if you can’t pay the debt and you want to file for bankruptcy. Can you get rid of the debt as part of the bankruptcy? The answer depends on what type of bankruptcy you are filing.
As part of your divorce you may have agreed to cover your ex-wife or ex-husband’s credit card debt, medical bills or personal loans. If you agreed to include this as part of your divorce decree then your agreement probably has a hold harmless clause. When you agree to hold your ex-spouse harmless you are agreeing to protect them from their possible liability for these debts. What does this mean for you? It means that if you fail to pay the debts that were assigned to you and the creditor comes after your ex-spouse, they can go to court to enforce the divorce decree. In a nutshell they can go to court to get a contempt order and enforce the divorce decree and what you agreed to.
What if you can’t afford to pay these debts and need to file for bankruptcy? Chapter 7 bankruptcy will allow you to discharge your personal liability to the creditor but it will not discharge the hold harmless clause. Chapter 7 will not help you get rid of the hold harmless clause because debts incurred as part of a divorce or separation agreement are considered non-dischargeable. This means that the creditor cannot seek to collect the debt after your discharge, but your ex-spouse can still seek to enforce the hold harmless clause. The divorce decree in this case trumps bankruptcy. A good example of this situation would be:
- Molly and David decide to get a divorce. Molly and David have credit card debt and medical bills. Each has debts that are solely in their name and debts that are in both their names. David agrees as part of the divorce decree to pay the debts in his name and the debts that are listed in both their names. The divorce decree states that David will pay his credit cards and the debts that are under both their names. The agreement states that it will hold Molly harmless for these debts. Later, David realizes he cannot pay the debts and files for Chapter 7 bankruptcy. David received a discharge in a Chapter 7 bankruptcy. David and Molly’s creditors cannot come after David for these debts, but Molly’s creditors (for debts she was listed on) can still seek to collect the debt against Molly. Molly may decide to enforce the hold harmless clause if one of these creditors comes after her.
Chapter 13 bankruptcy on the other hand can eliminate your liability for a hold harmless clause in a divorce or separation agreement. A Chapter 13 bankruptcy should be considered where it is likely the creditor will seek collection against your ex-spouse and your ex-spouse is not planning to file for bankruptcy. Through a Chapter 13 bankruptcy you can eliminate your personal liability from the creditor and from the hold harmless clause.