Debt plays a major role in many divorce cases and can complicate what might already be a difficult case. Attorney fees, child support, alimony and the addition of a new set of living expenses can drive a party's finances to the brink of ruin; with a significant debt load in the mix, divorce might mean total destruction. Fortunately for debtors, there exist several ways to ease the pain of debt in divorce.
Debt in Equitable Distribution and Community Property
Like property, debt can be classified and divided between parties pursuant to a divorce case. Regardless of whether the debtor's state is an equitable distribution (ED) or community property state, all debt incurred after the date of marriage and before either the date of separation or the date of divorce is presumed marital. This means that the other party can be forced to share in it even if that party's name and Social Security number aren't associated with the debt at all. A party must generally assert an equitable distribution or community property claim prior to the entry of an absolute divorce or lose the claim forever.
Getting Help From the Other Party
Pursuant to a state's ED or community property laws, the other party can be forced to share in the other party's debt. The debtor may be able to negotiate a debt-sharing arrangement in a separation agreement or in a consent order for cases that are already in court. This assistance may be in the form of direct payments or by giving the debtor a greater share of marital assets to help balance out the debt. If the other party is unwilling to yield, the debtor can ask the judge in an ED or community property trial to assign part of the debt to the other party. Pending trial, the debtor can move for a temporary distribution of the debt load.
Dealing With the Creditor
The wheels of justice turn with agonizing slowness in most family courts. Pending resolution of ED or community property issues, the debtor remains liable directly to the creditor on the debt regardless of what a family court judge eventually decides. Throughout this process, the debtor can negotiate directly with the creditor in an effort to obtain relief. Creditors can temporarily lower payments, grant extensions on repayment and agree to lump-sum settlements to extinguish the debt in full. Debtors should realize that where a creditor agrees to accept less than the full amount owed on a debt, the debtor may receive an IRS 1099 form for the forgiven amount. Under current law, the IRS considers debt forgiveness as a form of taxable income.
Bankruptcy Options
Where the debtor cannot make even minimum payments on a debt load and still pay his reasonable living expenses, bankruptcy protection under Chapter 7 or 13 of the U.S. Bankruptcy Code may be the only option. In bankruptcy, a debtor receives a discharge of all eligible debt (Chapter 7) or a significant portion of it (Chapter 13). Spousal support, child support, student loans and taxes are not eligible for discharge, so these debts will remain.
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