Articles Posted in Debt

wedding-rings---african-american-1384052-m.jpgThe first part of this discussion on bankruptcy gave an overview of the bankruptcy process and how it applied to couples who were still married. The second part will discuss the impact of bankruptcy when a couple separates or divorces.

What Happens If a Couple Separates?

In some respects, if a couple separates but remains married, the effect of one spouse filing for bankruptcy is not much different than if they lived together. Assuming the debtor spouse filed individually, the nonfiling spouse might find that certain marital property was considered part of the bankruptcy estate. While the debtor spouse could wipe away a substantial portion of his or her debts, the nonfiling spouse would still be responsible for his or her separate debts.

The above may depend upon how long the couple has been living apart. If the debtor spouse waits several years after the separation to file for bankruptcy, it is more likely that the bankruptcy court and trustee will view the nonfiling spouse’s property as separate property, not marital property that is part of the bankruptcy estate.
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wedding-ring-1415307-m.jpgWhen Denver couples divorce, few anticipate that one of the parties will file for bankruptcy, or that the bankruptcy could have such an impact on both of their lives. That is because there is a lot of confusion about bankruptcy in general: who applies for bankruptcy, what it involves, and its long-term impact.

This blog will look at bankruptcy as it relates to Denver couples who separate and divorce in two parts. The first part will discuss bankruptcy in general, and what happens when one member of a still-married couple files for bankruptcy. The second part will discuss potential problems a couple encounters when they separate and one party files for bankruptcy, or when one party files during or after divorce proceedings.

What Is Bankruptcy?

When individuals or couples file for bankruptcy, it is usually because they are looking to clear away debt. Their house might be “underwater” — meaning it is worth less than they owe on their mortgage — and they may have several large debts, such as for credit cards. In these situations, creditors will act aggressively to either pursue the debt or, if applicable, to foreclose or repossess the property. A family’s lives might be filled with threatening phone calls and letters. People in this situation typically file for bankruptcy because they have no other choice: they cannot make a deal with the credit card companies or afford to make their current mortgage payments.
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The attorneys at Plog & Stein help many Denver area family law clients come to grips with the concept of what constitutes “marital debt.” Ironically, when looking through the statutory section regarding divorce in Colorado, C.R.S. Title 14, Article 10, or the Uniform Dissolution of Marriage Act, one will find that there is no specific “debt” section. There is a section set aside for just about every other facet of a custody or divorce case, just not one for debt.

Without explanation, those lay people brave enough to try to figure out divorce statute and the meaning of “debt” may be left scratching their heads. In our divorce practice, we view debt almost as negative property in need of division. Setting that aside, definition is also needed. Courts generally view marital debt as debt incurred during the course of the marriage.

However, not all debt incurred during the course of the marriage is marital or subject to division. To understand what marital debt is requires a Colorado litigant to also understand what marital debt is not. Debt incurred prior to the marriage is non-marital or pre-marital debt. The debt a party has prior to the marriage remains his or her separate debt. This can include credit cards, student loans, a mortgage on a house, or any other pre-marital obligation. These debts are not divided by the court as part of the divorce process, though they can be viewed potentially as an economic circumstance when it comes to figuring out other aspects of a case, such as alimony or property.

Though pre-marital student loan debt is non-marital, there is an argument that student loans incurred during the course of the marriage are marital and should be divided. When working out a settlement agreement, or fighting in the courtroom, our general position is that student loans should be considered separate debt of the party incurring them. The benefit of the education gained will last a lifetime and well beyond the time period after the divorce in which financial entanglements may continue. On the flip side, one could argue that the other party derives a benefit from the student loans, such as more child support, based on more income, based on the education obtained via the student loan incurred during the marriage.

Another common misconception about marital debt is that if the debt is not titled jointly, it is non-marital. This analysis is generally wrong. Presuming that the individually titled debt was incurred for marital purposes, such as food, clothing, shelter, the kids, etc., the debt is marital, whether titled jointly or not. We see many families in which all the debt is in one party’s name due to him or her having better credit. It would be grossly unfair to stick that person with all the debt incurred during the course of the marriage solely because he or she was able to obtain the credit. Most Denver area courts ascribe to this theory as well.
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