Divorce and Bankruptcy

Posted on January 30, 2011 10:45am

Divorce and bankruptcy are two areas of the law that often overlap and affect each other in many ways. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 addresses some of the issues that arise when bankruptcy and divorce overlap. There are many considerations affecting whether and when to file for bankruptcy, and how bankruptcy will affect you. You should consult the laws of your state to determine how bankruptcy may affect your divorce (or how your divorce may affect your bankruptcy). You should also consult the federal bankruptcy laws for more information on how bankruptcy may affect your divorce.

Bankruptcy Basics

Bankruptcy is a complicated area of law and attorneys who practice bankruptcy law generally focus most of their professional efforts on this niche. Bankruptcy cases are heard in the Federal Bankruptcy Court. You should consult the bankruptcy laws and/or a bankruptcy attorney for information more specific to your needs.

When a person files for bankruptcy "automatic stay" provisions come into play and most creditors must stop collection methods. Under a Chapter 7 bankruptcy the debtor's assets are collected by the trustee and sold to pay the creditors. Only "exempt" property is protected under a Chapter 7 bankruptcy. Under a Chapter 13 bankruptcy the filing party's debts are reorganized and paid off in three to five years. The filing party keeps all property under a Chapter 13 bankruptcy. Chapter 11 bankruptcy is less common for individuals and is a more complicated reorganization bankruptcy. Chapter 12 bankruptcy is for farmers and fishermen.

How Does My Spouse's Bankruptcy Affect Me?

One of the most important aspects of the BAPCPA as it relates to a divorce is that the automatic stay does not apply to spousal support or child support, so these will continue to be collected. In addition, unsecured property settlement debts (debts owed to you by your spouse in your property settlement) are not subject to discharge in bankruptcy. The support obligations are "first priority claims" that generally cannot be discharged. (Some examples of claims entitled to a priority are certain taxes, employee wage claims earned within 90 days before the bankruptcy filing up to a certain dollar amount, alimony, etc.) Other debts that generally cannot be discharged include student loans.

In addition, your spouse's filing for bankruptcy should not affect your right to receive wage garnishment for the support owed to you. Generally, your spouse's filing of bankruptcy will not affect your collection of his or her past-due support, but under some bankruptcy plans the past-due payments may be discharged.

In some instances, your spouse's filing of bankruptcy may be helpful as he or she will disclose income, real property and personal property when filing. You may be able to use property that was exempt from discharge to collect what support or property settlement obligations are owed to you.

A bankruptcy can, however, delay divorce proceedings. The State court handling the divorce will have no authority to make orders regarding marital property until either the bankruptcy is concluded or the automatic stay is lifted.

How Can I Protect My Property Settlement from My Spouse's Bankruptcy?

A money settlement is most likely to be property exempt from discharge in a bankruptcy if it appears to be a support arrangement, although with the change in bankruptcy laws in 2005 it is generally no longer necessary to characterize money settlement as support to avoid discharge. The court will look at the schedule of payments (one-time payment or installment payments), whether a major life event (like remarriage) affects the payment, whether there was a need for support, and other indicators that the payment was intended as support. Ultimately, the bankruptcy court is not bound by what you call the money settlement in your divorce.

Can My Spouse and I Jointly File for Bankruptcy?

Two people can file for bankruptcy jointly only if they are married at the time of filing. Jointly filing for bankruptcy prior to divorcing may simplify your divorce as your property and debt division can generally be worked out much more easily. You might also consider jointly filing for bankruptcy prior to your divorce if you know that you or your spouse may have difficulty meeting your financial needs after your divorce is finalized.

Can My Spouse Get Out of Paying for the Debts Awarded to Him or Her in Our Divorce?

Your spouse's later bankruptcy might result in a discharge of the debts awarded to him or her in your divorce. Creditors are not a party to your divorce, and you may find creditors seeking payment from you when your spouse files for bankruptcy.

At your request, a "hold harmless clause" in your final divorce settlement might be enforced by the bankruptcy court in a Chapter 7 divorce. A hold harmless clause states that your spouse will hold you harmless from collection actions on the debts awarded in the property distribution. Your spouse's payments to a creditor might also be considered support if they are for such things as the mortgage on the home that you are living in, and might not be dischargeable in bankruptcy.

You should consult a qualified family law attorney to help you navigate the issues discussed above. And if you think that your spouse may file for bankruptcy following your divorce, you should consider consulting a bankruptcy attorney prior to filing to determine whether it will be in your best interests to file jointly or alone for bankruptcy prior to your divorce.

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