Divorce and bankruptcy

When a marriage breaks up, the routine of the family is shifted and the family enters the transition of separation that brings stress, confusion, and uncertainty.  Most people consider different aspects of the separation according to each situation.  Often, these considerations include custody, child support and division of property.   However, many couples do not consider the effects of divorce on their debt.

Consumer bankruptcy may be a solution to the debts, however, many factors must be considered and consulting a practitioner knowledgeable in both bankruptcy and divorce will provide information to help assure you that the right decisions are being made regarding bankruptcy, the timing of filing, the effects of the automatic stay, and how bankruptcy will affect marital debts, child support and maintenance.

Chapter 7 and Chapter 13 Bankruptcy

There are two main chapters of bankruptcy for consumers, namely, Chapter 7 and Chapter 13.  Chapter 7 is a shorter proceeding that will allow the debtor to discharge most of his or her debts.  Chapter 13 is a repayment plan that requires debtors to make a monthly payment over 36-60 months, and most balances remaining at the end of the repayment plan are discharged.  The decision on which chapter should be carefully discussed with a bankruptcy and family law practitioner as to which chapter will grant the debtor their financial fresh start without delaying their fresh start at independence.  Considerations to include are timing, dischargability of property settlements, status of secured debt, income and child support to name a few.

The automatic stay

If you or your spouse files bankruptcy after filing for divorce and before finality of divorce, he or she becomes a debtor under the Bankruptcy Code and an automatic stay is created to make sure no property is transferred or debts are collected.  The automatic stay will cause a temporary standstill in the divorce proceedings as to division of property and debts.  The family law attorney needs to understand bankruptcy law in order to protect his or her client during a divorce with a bankruptcy pending.  It is important for the family law attorney to know what orders can be entered by the state court during the bankruptcy and what orders will violate the federal law.

Marital debt

When either party contemplates bankruptcy, one consideration is the timing of the filing and whether the parties should file a joint bankruptcy before or during the divorce, or an individual bankruptcy before, during, or after the divorce.  Your creditors are not part of the divorce, and the family court cannot alter, modify or revise the contract between debtors and their creditors.  Therefore, any joint debt discharged by one party will leave the other party solely liable, exposed to collection efforts and law suits, and will often forcing the other spouse to repay or file bankruptcy.

Under a Chapter 7, any debt incurred to a spouse or former spouse that is incurred during a divorce by agreement, decree or court order is not dischargable.  If any assets are recovered, these debts are paid before most of the other debts.  Under a Chapter 13, the debtor may receive a discharge from obligations incurred as part of the divorce if certain conditions are met.

Child support and maintenance (or alimony)

Filing a bankruptcy does not stop payment of child support or maintenance, known as “domestic support obligations”.  Additionally, support arrearages are not dischargeable, however, the automatic stay may cause a delay in the collection of support arrearages during the bankruptcy.

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