The Intersection of Bankruptcy and Divorce

June 15, 2011 (Press-News.org) In the current economic downturn, many people are considering bankruptcy as a way to manage overwhelming debt. With the stress of financial difficulties straining relationships, more couples are also getting divorced. Before filing for bankruptcy and divorce, though, spouses should understand how each process affects the other process, future debt obligations and marital property division.

Bankruptcy and Domestic Support Orders

By filing for bankruptcy, people can reduce, restructure or even eliminate their debt. Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, some people also used bankruptcy as a tool to avoid financial obligations to former spouses because spousal support (sometimes called alimony) and other support obligations were unsecured debt that could be discharged in bankruptcy.

Now, however, federal bankruptcy laws consider any "domestic support obligation," such as spousal support, ineligible for discharge. According to the bankruptcy code, a debt is a domestic support obligation if:
- The debt is owed to a spouse, former spouse, child, child's parent or guardian, or a governmental entity.
- The debt is a form of alimony, maintenance or support, regardless of what the divorce decree calls it.
- The debt arose from a separation agreement, divorce decree, property settlement agreement, other court order or determination of a government unit.
- The debt is not assigned to a nongovernmental entity, unless the person owed the debt voluntarily assigned the right to collect the debt to the nongovernmental entity.

Most spousal support and child support orders qualify as domestic support obligations. Therefore, spousal and child support obligations cannot be eliminated in bankruptcy. In addition, an individual will not receive an order of discharge from the bankruptcy judge until all domestic support obligations are current.

Depending on the type of bankruptcy, other debts established by a divorce decree may or may not be eliminated. In Chapter 13 bankruptcy, debts to a former spouse that are not domestic support obligations can be discharged; in Chapter 7 bankruptcy, they cannot.

Automatic Stays

Another important feature of bankruptcy is an automatic stay placed to stop all creditors' collection efforts once a bankruptcy petition is filed. This stops foreclosure proceedings and can even prevent a petitioner's spouse or former spouse from collecting money from him or her.

But, an exception exists for domestic support obligations, and the automatic stay does not apply to the establishment or modification of a domestic support obligation like spousal support. Nonetheless, filing for bankruptcy is likely to suspend or postpone divorce proceedings.

Bankruptcy Timing and Filing

Spouses considering divorce and bankruptcy have several options. They can file for bankruptcy jointly or individually before getting divorced, or they may file for bankruptcy individually after the divorce.

Even after a divorce is finalized, a former spouse may still be personally liable for debts the other spouse acquired during the marriage. And, when one spouse/former spouse files for bankruptcy individually, any discharge of that individual's debt does not eliminate debt that could be applied to the other spouse/former spouse.

Therefore, if a couple has significant debt for which either person could be liable, it may be better to file for bankruptcy jointly so any debt discharge applies to both. Also, couples who file for bankruptcy jointly can pay court filing fees and any attorney's fees together, rather than paying more for two separate filings and attorneys in individual bankruptcies. Of course, the best time and filing status for bankruptcy depends on each person's unique circumstances.

Marital-Property Division

When a divorcing couple has a lot of debt, one person may receive a greater share of the couple's assets in exchange for agreeing to pay off a larger portion of the debt. In these instances, the division of debt and assets should be carefully structured in the divorce decree, especially when bankruptcy is a possibility. This is because some of the debt allocated to that person later may be discharged in individual bankruptcy, leaving the former spouse who filed for bankruptcy with a lion's share of the assets and virtually no debt.

To learn more about property division and the financial aspects of divorce, contact a knowledgeable family law attorney in your area. If you are considering divorce, an experienced lawyer can help ensure that the division of assets and debts between you and your former spouse is fair.

Article provided by James D. Garrett & Associates, P.C.
Visit us at www.jamesgarrettlaw.com