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BANKRUPTCY AND DIVORCE
Bankruptcy Before Divorce
There was once a time when both of these choices were
unthinkable except under dire need, yet now divorce is
common in our society and bankruptcy is seen as a tool
of financial survival in these times of greater economic
complexity and hardship. If you think you're headed for divorce
and have a lot of debt between the two of you, it might make sense
to file for bankruptcy before starting a divorce proceeding.
Filing bankruptcy prior to filing for divorce could
serve to simplify the divorce by resolving some of your debt.
You and your spouse could potentially simplify the divorce process
by having less debt to sort out in the divorce proceeding. It
will also be more economical to file a joint bankruptcy rather
than two individual ones. Also, you may avoid the potential that
your spouse files a bankruptcy later on and leaves creditors on
joint debts looking solely to you for repayment of those debts.
Some things you need to remember though:
- Debts incurred during the marriage are typically
the responsibility of both parties in a divorce proceeding.
- If your former spouse fails to pay his or
her debts, you will be responsible for them.
- If your former spouse files a bankruptcy
and you do not, you will be liable for jointly incurred debts.
Bankruptcy During Divorce
When one or both spouses file bankruptcy all the jointly owned
becomes a part of the bankruptcy estate and is available to pay
debts to the extent that the property Is non-exempt property.
The bankruptcy estate is simply all of the property that you own
at the time the bankruptcy is filed.
When you or your spouse file a bankruptcy, an automatic
stay under the Bankruptcy Code immediately stops creditors' efforts
to collecting on most debts. Creditors that want to proceed with
collection efforts must seek the permission of the Bankruptcy
Court. However, the automatic stay doesn't prevent you from asking
a divorce court to order your spouse to pay child support or alimony.
Once a Bankruptcy Court decides property is "exempt",
that is, it is not part of the bankruptcy estate and so it is
not available to be sold to pay debts, the Court in the divorce
proceeding can then divide that property.
Bankruptcy After Divorce
You've already been through a divorce and now you find out that
your former spouse has also filed bankruptcy. How do you protect
yourself and make sure that your divorce agreement is honored?
If either you or your spouse files a bankruptcy
an automatic stay will go into effect. This means that all efforts
to collect on a the debt must cease. You need to understand, however,
that there are exceptions to the automatic stay.
Under a bankruptcy and divorce settlement, support
payments are not classed as dischargeable debts. In other words,
your former spouse must still meet these debts. Support payments
for a former spouse or minor children must be honored.
Examples are child support, alimony or spousal support,
as well as the lawyer's fees surrounding these issues.
The following bankruptcy and divorce related debts
do not get discharged when a bankruptcy is filed:
- Alimony and child support
- Some obligations for property
settlement in divorce
- Student loans
- Debts that pertain to fraud
or theft
- Criminal restitution
In conclusion, it may suit your needs to file for
bankruptcy before filing for divorce. In this way, you may have
less debts to divide in the divorce settlement. This may make
it easier to negotiate a fair settlement. It may also be more
cost effective because you can file a joint bankruptcy as opposed
to two individual bankruptcies.
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