Takeaway: Timing is crucial when it comes to divorce and bankruptcy proceedings, as is knowing what to expect when the cases are closed.
In many cases, personal bankruptcy and divorce go hand in hand. Money is one of the top reasons that couples fight; therefore, money is one of the top factors in a divorce. Sometimes, couples cannot resolve their issues about money, and one or both spouses decide that the marriage is irretrievably broken. In this event, one or both spouses may file for a divorce to have the marriage dissolved. Unfortunately, if the spouses have accumulated a significant amount of joint marital debt (or they live in a state where marital debt is divided equally, regardless of whose name the debts are in), filing for divorce may only make the money problems much worse.
In addition to dealing with overwhelming debt problems, the couple will now face paying attorney fees and costs for the divorce action. However, if the couple can work together to file a bankruptcy case prior to filing for divorce, the bankruptcy case may be able to resolve some of the debt problems. If so, the couple may be able to save time and money, simplifying the divorce proceedings by removing the issue of joint marital debts.
However, this may not always be the case. Couples may not be able to put aside their differences in order to file a joint bankruptcy case, or one spouse may be unwilling to file a bankruptcy case. In some of these situations, it may still be advantageous for a spouse to file a bankruptcy either right before, during, or right after a divorce proceeding. In many cases, only an experienced bankruptcy attorney working in conjunction with an experienced family law attorney can properly advise you of the best option for your specific situation. However, here we’ll look at some of the key facts you should know if both divorce and bankruptcy are imminent in your case.
Facts About Filing a Personal Bankruptcy While Seeking a Divorce
As discussed above, whether it’s better for you to file a personal bankruptcy before, during, or after your divorce proceeding depends on your specific situation. However, below are five facts about bankruptcy and divorce that you may want to consider as you consult with your bankruptcy attorney and your divorce lawyer.
- The Bankruptcy Automatic Stay
If you file for bankruptcy during your divorce proceeding, the automatic stay provided by the Bankruptcy Code will put a temporary hold on the division of property and debts in your divorce proceeding. While you are a debtor in bankruptcy, you are not permitted to transfer any assets, including those in a divorce action. You may also be unable to pay any joint marital debt if the debt is an unsecured debt. It is vital that your divorce attorney understand how a bankruptcy filing affects a divorce proceeding. Because most divorce attorneys are not as familiar with bankruptcy law as bankruptcy attorneys are, it is advisable that your divorce attorney discuss the bankruptcy filing with your bankruptcy attorney prior to filing in order to work out the details to your best interest.
- Unsecured Marital Debt in Bankruptcy
If you file for bankruptcy, you will receive a bankruptcy discharge to all unsecured marital debt. This means that you will no longer be legally liable for the repayment of the marital debt, and the creditor can never try to collect that debt from you. However, the creditor may pursue your ex-spouse for payment of the full marital debt since it cannot be collected from you. A problem arises if the family court ordered you to pay some or all of the marital debt. If you do not pay this debt, your ex-spouse can file a motion with the family court to hold you in contempt of the family court order. You should discuss this possibility with your bankruptcy attorney prior to filing. (Learn more about the bankruptcy process in 8 Things You Should Know About Bankruptcy.)
- Filing a Joint Bankruptcy Petition
Some couples choose to file a joint bankruptcy petition prior to filing for divorce. In this case, the couple can discharge debts through the bankruptcy case so that both parties are able to get rid of the marital and individual debts to obtain a fresh start. This may also make the divorce less complicated and costly. Couples do not need to live in the same household to file a joint bankruptcy petition.
- Discharging Spousal and Child Support
The filing of a bankruptcy case will not discharge your obligations to pay domestic support obligations (i.e. child support or alimony). These amounts are non-dischargeable and will remain due after your bankruptcy case has been closed.
- Domestic Support Obligation Arrearages
Even though you cannot discharge your child support or alimony through your bankruptcy case, if you are behind in your payments, filing bankruptcy may still help you avoid jail for failure to pay your support payments. If you file a Chapter 13 bankruptcy case, you may include the past due child support or alimony payments in your bankruptcy plan. The arrearage j will be paid through your bankruptcy plan, but you must make your regular payments outside of bankruptcy and keep those payments current at all times.
Timing of Bankruptcy and Divorce Filings
As discussed above, the timing of your bankruptcy and divorce filings is critical. For some people, filing a bankruptcy before a divorce case may be in their best interest, while it may be better for others to file bankruptcy after their divorce is final. If you are contemplating a divorce and a bankruptcy, it is best to consult with two experienced attorneys who know how to use a bankruptcy case to help you resolve your debt problems as you are dissolving your marriage.