Bankruptcy and Divorce

July 28, 2012

Divorce is often the cause of serious financial stress, and many individuals going through a divorce wonder if they should file for bankruptcy. They wonder how they will be affected if a spouse files. They may hope that they can avoid paying child support or alimony if they are declared bankrupt. They have questions about the automatic stay and how it might protect them from creditors.

An Automatic Stay Does Not Cover Alimony and Child Support

Although specific answers to questions like these depend on an individual's circumstances, there are some basics that anyone thinking about bankruptcy and divorce should explore. For example, the automatic stay does not protect a person from all types of collection efforts. The law allows actions for establishing or collecting child support and alimony to continue - the automatic stay does not usually apply.

Property Settlements: A Gray Area

Property settlement payments from divorce are technically nondischargeable in bankruptcy and must be paid. However, a spouse who can show that he or she cannot meet the settlement obligation and take care of child support or operate a business may be able to persuade a court that the harm caused by paying the settlement outweighs the damage to the payee caused by not receiving the payment.

Because support is nondischargeable, whereas a property settlement might be dischargeable, it becomes important to structure your divorce accordingly if you suspect your spouse is considering bankruptcy. You will want to emphasize the support, possibly at the expense of a property settlement.

Protect Yourself

There are other things you can do to protect your interests if you believe your spouse might file for bankruptcy and jeopardize a property settlement. You could take out a lien on the property, which would make you a secured creditor and put you in line to be paid if he or she files for bankruptcy. However, this could be complicated and requires the advice of an attorney who knows your specific situation.

Should We File Together?

Some people ask whether they should file bankruptcy jointly. The answer, of course, depends on the situation, but there are several reasons to file together - before the divorce. First, you will save money: You will pay for only one bankruptcy. Second, you will know exactly the amount of property and income that can be considered in the divorce. This approach, however, probably works best for couples who are relatively amicable.

One downside of filing a joint bankruptcy is that both incomes will be considered, possibly ruling out eligibility for a Chapter 7 bankruptcy and debt discharge. This might be a good reason to wait until the divorce is final and each individual's income can be considered separately.

Bankruptcy and Divorce Can Work Together

There are so many factors to consider: your income and debt, levels, the amount of property owned, the types of creditors (secured or unsecured), and the existence of student loan and tax debt, to name just a few. Consulting an attorney who handles both bankruptcy and divorce is a good first step to finding out about the options available to you.

Article provided by Patriot Law Group Rhode Island
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