Debt After Divorce: Getting a Clean Slate through Bankruptcy

Going through a separation and divorce carries with it a significant financial burden. The cost of going through a divorce can be substantial, and once the process is done, both parties are often left with substantial debt, reduced income and a new financial situation where bills are only moderately reduced while income is often halved or more.

Marital Property Agreements

When most people consider the distribution of marital property, it's unlikely that debt comes into the picture until the divorce is finalized. Debts accumulated during a divorce are often divided between the separate parties, and many times, one or both former spouses can find themselves in a situation where repaying debt and starting over is simply unrealistic. It is at this point where many consider debt relief options like consolidation, debt settlement or bankruptcy.

Filing Bankruptcy: A Scary Idea with Very Real Power

Many people associate the term bankruptcy with giving up, or losing, but the reality couldn't be further from the truth. Unlike every other option for getting relief from debt, only bankruptcy offers legal protection and rights to a debtor to erase debts, stop collection efforts, stop a foreclosure and get a real "fresh start".

What Can Be Erased?

Debt incurred after a divorce is often made up of some combination of credit card debt, mortgage, personal loans or HELOC's, medical debt, legal bills, auto loans and other common types of debt. All of these debts are treated differently, but generally fall into two categories; Secured and Unsecured Debt.

Unsecured Debts

Unsecured debts are those for which there is no asset or collateral backing the money owed. Most common types of unsecured debts are credit cards, medical bills and personal loans. In a typical chapter 7 bankruptcy case, these are all discharged, meaning the debt is erased and the petitioner no longer has any liability to repay it.

Secured Debt

Secured debts are those which are backed by some type of collateral. The two most common secured debts are a mortgage note and a car loan. These are a little more complicated. Depending on the equity that the petitioner has in the property, it is possible for the bankruptcy court to liquidate the asset to raise funds for the benefit of the creditors. However, there are also many exemptions protecting this property from a chapter 7 liquidation.

Additionally, there are a number of options for debtors who wish to keep there home equity, or a car that's been paid off, while still eliminating most or all of their unsecured debt.

Talk to an Attorney

Anyone facing significant financial hardship should take some time to talk to an attorney about their situation and find out what legal options they have to reduce or eliminate debt and start over with a clean slate.