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The Effects of Declaring Bankruptcy On A Divorce Case

Posted by David Falvey on Wednesday, September 18th, 2019 - 381 views

The effects that declaring bankruptcy can have on a divorce case can be complicated but its not as complicated as you would think it is.

Divorces happen for many reasons; one of the reasons is when a couple can’t pay their bills.

Even when they can pay their bills while living together, they quickly find out that the cost of living separately can become more than they can manage when they divorce and live apart.

Divorce and bankruptcy casesIf two spouses file for divorce and then one or both spouses declare bankruptcy, there are certain actions that are allowed to proceed in the divorce court, and certain actions that can’t proceed due to the filing of the bankruptcy petition.

Actions that can proceed in divorce court after a bankruptcy is filed

If one or both spouses file for support, decisions still need to be made about child custody and child support.

Even the bankruptcy court recognizes that the interests of children are paramount.

The divorce court can hear and will decide which parent(s) will have legal and physical custody of the children based on the best interests of the children even though a bankruptcy petition is filed.

Children are also entitled to support payments on their behalf even though the available property and available income hasn’t been decided.

The divorce court will generally decide the amount of support based on the current assets and income of the spouses.

In many states, courts normally don’t place much weight on the debts of the spouses to begin with.

Rather, they focus on what income the parents have, and make payment of the child support the main priority.

If circumstances change (such as discharged debts), once the bankruptcy issues are resolved, then either spouse can request a change in the custody order or the child support order based on the changed financial circumstances.

Generally, alimony payments on behalf of a spouse will also proceed even though a bankruptcy is filed.

Alimony rights vary from state to state.

Some states authorize temporary alimony while the divorce is pending.

Many states authorize some alimony to help one spouse earn an income or get an education.

Many states also authorize long-term alimony in cases where one spouse is not likely to be able to earn a comparable income to the other spouse and the couple has been married for a long time.

See my previous article: Paying Alimony And Child Support Payments After A Bankruptcy

Another key consideration involving child support and alimony is that the debtor generally cannot discharge any existing debts they have because they failed to pay child support or alimony.

At best, the debtor will be required to continue to make future child support payments and alimony payments, but may have extra time (if they file a Chapter 13) to pay off any arrears.

Divorce actions that are stopped once a bankruptcy petition (7 or 13) is filed

The filing of either a 7 or 13 bankruptcy petition normally acts as an automatic stay of any creditor actions to collect on any outstanding debts.

The filing of the petition also stops any divorce proceedings seeking to divide any marital assets.

The marital assets are typically the assets that are owned by both spouses.

They may also include assets owned by only one spouse including the debtor who files the bankruptcy petition.

This means that if spouses own a home, for example, then the divorce court can’t make decisions about which spouse gets the marital home, or how much the spouses get if the home must be sold – until the bankruptcy issues are resolved.

In the same way, all other marital assets such as cars, bank accounts, and retirement benefits can’t be divided until the bankruptcy is completed

Obtaining relief from the bankruptcy petition

If only one spouse files for bankruptcy, the divorce lawyer for the other spouse has the right to ask for relief from the automatic stay so the divorce action can proceed.

The divorce lawyer either needs to be a member of the federal bar or must work with a bankruptcy lawyer who is a member of the federal bar to file a formal Motion for Relief from the Bankruptcy stay.

The bankruptcy judge may or may not grant bankruptcy relief depending on the facts of the bankruptcy case and the essential facts of the divorce case.

If a Motion for Relief is not filed, then the bankruptcy case will proceed until there is a formal discharge, or until the petition is dismissed.

Only then, will the division of property issues be allowed to proceed in the divorce court

Practical considerations when a spouse files for bankruptcy relief

Whether a spouse should seek relief depends, in large part, on what type of bankruptcy petition the spouse filed.

If a spouse files a Chapter 7 petition to be able to discharge unsecured debts such as credit card debts and medical bill debts, then that case normally proceeds to a conclusion fairly quickly – normally about six months’ time.

As a practical matter, it may make sense for the non-bankruptcy spouse to wait until the Chapter 7 discharge because six months is normally not that long of a time period.

Also, the more a spouse can improve his/her debt situation by having unsecured debts discharged, then the easier it is for both spouses to negotiate a divorce settlement.

It can also be easier for a divorce court judge to decide how to divide the assets knowing that the unsecured bills have been discharged.

See also: Top 10 Important Facts About Bankruptcy and Divorce

There is the danger that if the house is titled in the name of the spouse who files for bankruptcy, then the bankruptcy trustee may sell the house and use the assets to pay the creditors.

In this scenario, the spouse who didn’t file for bankruptcy will generally need to seek relief from the automatic stay to claim her/his rightful share first.

If the debtor files a Chapter 13 bankruptcy petition, the issues become more complicated.

Debtors usually file a Chapter 13 bankruptcy to save their home and other secured assets.

In a Chapter 13 bankruptcy, the debtor agrees to pay the future mortgage bills and secured debts and agrees to pay off all the arrears over 3-5 years.

The spouse who didn’t file for bankruptcy may then have a few concerns.

On the one hand, she/he won’t want to wait 3-5 years to resolve the division of property issues.

On the other hand, the Chapter 13 bankruptcy may be the only way to save a key asset such as a home.

Without a home, the spouse who didn’t file may not have a place to live and her/his children may not have a home.

A divorce court can’t divide a home – if there’s no home to divide.

In many cases, both spouses owe on the secured debts – especially a home mortgage – so they usually both file a Chapter 13 in order to save their home.

The Take Home

The information in this document pretty much sums of the legal ins and outs of dealing with a divorce during bankruptcy proceedings, but cannot be taken as legal advice. To get the best advice and direction possible, contact your local bankruptcy attorney whom will be willing to sort out the issue with you and provide you with the important legal advice possible.