Bankruptcy and Divorce

Unfortunately, bankruptcy and divorce can be interrelated.  When there are not enough assets or income in the marriage and a bankruptcy is necessary, you and your attorney should discuss when to file for bankruptcy, how to file for bankruptcy and the bankruptcy’s effect on the current or future divorce case.  The bankruptcy can have a big impact on the divorce.

If I am contemplating filing for both divorce and bankruptcy, should I file one or the other first?

If you and your spouse have substantial debts it may make sense to complete a joint bankruptcy before completing a divorce. By discharging debts before completing the divorce, you can simplify the division and distribution of the marital property and avoid problems of possible future liability from debts assigned to your spouse in the event of his or her bankruptcy. However, the decision is not necessarily an either-or choice.

I’m in the middle of divorce proceedings and my spouse just filed for bankruptcy. How will this affect the divorce proceedings?

When a party files for bankruptcy, an automatic stay (injunction against creditors) becomes effective. A bankruptcy estate is also created. The estate includes all non-exempt property of the party petitioning for bankruptcy. The automatic stay does not affect custody and visitation disputes or divorces except to the extent that division of bankruptcy estate property is at issue.

The divorce court does not have authority to divide property in the bankruptcy estate. The divorce court retains authority to determine custody, visitation, child support and maintenance. Therefore, bankruptcy proceedings can stall or delay the division of property in divorce proceedings.

How long does the automatic stay last?

Generally the automatic stay remains in place until the debtor receives a discharge in the bankruptcy case. However, there are other significant limitations on the automatic stay which a debtor, or anyone seeking to avoid the automatic stay, should discuss with a bankruptcy attorney.

What are the different types of bankruptcy and what is the relevance to divorce cases?

Individuals can file for bankruptcy under Chapter 7 or Chapter 13. Chapter 7 is a total discharge of debts whereas Chapter 13 is a repayment plan allowing the debtor to make payments over the course of time (5 years in many cases) and then have remaining debts discharged. The type of bankruptcy (7 or 13) affects which debts can be discharged, if and when debts will be discharged, and the contents of the bankruptcy estate.

In relation to divorce, one difference is that property settlements contained in a divorce judgment (Marital Settlement Agreement) are no longer dischargeable under Chapter 7, but are dischargeable if certain conditions are met under Chapter 13.

My ex-spouse just filed for bankruptcy. Will this affect his obligation to pay child support and maintenance?

No. In fact, child support and maintenance (referred to as domestic support obligations in the bankruptcy statute) receive priority treatment. Therefore, under Chapter 7 property is first distributed to fulfill the support obligation, and under Chapter 13 the support obligation must be paid in full during the bankruptcy proceedings. Under the new bankruptcy law, failure to pay current support obligations in full can result in denial of a discharge under Chapter 13.

When my ex-husband filed for bankruptcy, he owed a substantial amount of child support. How and when can I collect the past-due child support?

Support obligations, such as child support, are not dischargeable under Chapter 7 or Chapter 13. The bankruptcy will not affect your ability to collect past-due support, but the automatic stay may prevent you from attempting to collect pre-bankruptcy-petition past-due child support from property in the bankruptcy estate, and a debtor’s income is part of the bankruptcy estate in a Chapter 13 bankruptcy.

My marital settlement agreement/divorce judgment requires my ex-spouse to pay certain debts incurred during the marriage. Can he avoid liability for these debts by filing bankruptcy and will I become liable for these debts?

Obligations assumed in a divorce are not dischargeable under Chapter 7. Therefore the debtor cannot avoid liability for these debts. These debts, however, may be discharged under Chapter 13 if the debtor complies with the payment plan and has paid all support obligations in full. Therefore, you may become liable for these debts despite the marital settlement agreement and the divorce.

My marital settlement agreement/divorce judgment requires my ex-spouse to make payments to me as part of the property distribution. How will these payments be affected if he files for bankruptcy?

These obligations are treated the same as the assumption of debts in a divorce. Under Chapter 7, your former spouse cannot avoid these obligations, but may be able to avoid the obligations under Chapter 13 bankruptcy.  To protect your rights, however, you may need to file a claim in the bankruptcy like other creditors.