For many people, divorce can cause a huge financial strain in already tough economic times. In others cases, it’s the crushing weight of debt that leads to the dissolution of a marriage. Whatever the ultimate cause, and effects, when considering bankruptcy amid a divorce it’s important to know a few basics.
Divorce Decrees and Bankruptcies
Because your bankruptcy only includes debts in existence at the time of your bankruptcy filing, a subsequent divorce decree (i.e., a divorce decree following the date of your bankruptcy petition) remains intact and won’t be included in the debt dispensed by your bankruptcy. While few attorneys would urge you to continue in a bad relationship for money, some good advice might be to time your bankruptcy filing so that it follows (and includes) the divorce decree or separation agreement. Keep in mind that only Chapter 13 bankruptcy discharges debts and equitable distribution obligations, as long as they are not considered alimony or child support or in lieu of either kind of domestic support. Sometimes, obligations to pay the other spouse's attorney fees related to the separation or divorce might sometimes be considered domestic support obligations and therefore non-dischargeable.
All obligations under a separation agreement remain intact and enforceable after a Chapter 7 bankruptcy, as Chapter 7 does not afford the debtor a discharge of any separation or divorce-related obligations.
Preparing for Property Divisions
When a divorce court awards you property or other assets, it remains your property even if your ex-spouse files for bankruptcy. However, in a case where the divorce court orders property transferred to you but your ex does not follow through with the transfer prior to his or her bankruptcy, your ex may be able to evade that debt through bankruptcy. As a result, timing is of the essence and incredibly important to keep in mind—especially if you are considering divorce at the same time your spouse is considering bankruptcy.
Short and sweet: if you are entitled to a part of the property divided between you and your ex-spouse, within 180-days of your bankruptcy, you may be forced to forfeit it to the bankruptcy trustee.
Bankruptcy Courts Trump Divorce Court Considerations
A bankruptcy court looks at your actual financial situation and makes determinations about your ability to discharge any and all of your debt. As a result, obligations that may be deemed non-dischargeable debt by a state court or your spouse (or even you) are not necessarily binding in your bankruptcy result. Ultimately, the bankruptcy judge will decide who owes what and when post-bankruptcy. As mentioned before, Chapter 13 discharges most non-domestic support obligations that are part of a separation agreement or divorce order. A Chapter 7 will not discharge any obligations incurred as part of the separation or divorce.
Spousal Support Remains Exempt Even When Property Does Not
As mentioned, if you’re in the midst of a divorce and are awarded property in the divisions, it is possible that some of the property you are entitled to receive won’t be exempted when creditors come calling following your bankruptcy. A good bankruptcy attorney will help you with exemption planning - finding legal ways to protect your property with available state law or federal exemptions. Conversely, if you’re entitled to spousal support when you file, most, and possibly all of that cash, is off-limits to creditors clamoring to take what they can get in your insolvency.
When considering the balance of divorce and bankruptcy, it is essential to let good timing, and better temperament, prevail. If debt does you part, remember to plan ahead and reduce tensions between you and your soon-to-be-ex-spouse; work toward a settlement that is in both of your best interests, including those of the bankrupt party; and explore your financial obligations now—to avoid complicating your divorce with arguments over child and spousal support, insurance, retirement accounts and attorney’s fees.
Most importantly, if you have been affected by the financial downturn, are facing a divorce or separation and are wondering how to get back on track, knowing a qualified bankruptcy attorney can also help you to conquer your creditors, the costs of your marriage dissolution and face any other financial fears, yielding the right kinds of support, information and insights—at a low cost. The bankruptcy experts at the Law Offices of John T. Orcutt offer a totally FREE debt consultation and now, more than ever, it’s time to take them up on their offer. Just call toll free to +1-888-234-4190, or during the off hours, you can make your own appointment right online at www.billsbills.com. Simply click on the yellow “FREE Consultation Now” button.