Seeing as financial problems are the number one cause of divorce in the U.S., bankruptcy and divorce often go hand-in-hand. Unfortunately, each one complicates the other. Understanding now bankruptcy laws affect a divorce and divorce-related debt depends on where you are in the process. Different considerations apply depending on whether you are considering divorce, have already started the process or if you have final orders in the divorce action.
If you are considering divorce and you have debt you cannot manage the best course of action is to determine your bankruptcy options. It is important to understand if you qualify for Chapter 7 bankruptcy or whether there is a reason you would need to file Chapter 13.
Usually, when one spouse is considering bankruptcy it makes sense for both spouses to file for bankruptcy and get rid of their debts together. In fact, separated couples can file a joint bankruptcy case. This is a big decision, however, and depends on your ability to communicate and work together during the bankruptcy process. Often, it makes the most sense to file separate bankruptcies and avoid conflicts of interest.
The reason that filing bankruptcy, together or separately, prior to filing for divorce is the best idea in most cases is that discharging the credit card debt, medical bills, pay day loans and other debts means that those debts will not get divided up in the divorce. Usually, if there are marital debts, such as credit card bills, the family court will take these into consideration when dividing property. Often one spouse will be ordered to pay off debt as part of the divorce. If that spouse does not fulfill that obligation and refuses or is unable to pay that debt, the credit card companies, who are not bound by the divorce decree, can still sue and collect against the other spouse after the divorce (the spouse who gets sued can go back to family court to try and collect against the ex, but this is expensive and messy). Bankruptcy will wipe out that liability and prevent this issue from occurring after the divorce.
The bottom line is that filing bankruptcy before filing for divorce can make the divorce process less complicated, both during the divorce and after.
In the Process of a Divorce
If you are already in the process of dissolving your marriage, there are important things to understand about how filing for bankruptcy during a divorce can affect the proceeding.
First, the filing of a bankruptcy during a divorce can stop the divorce case in its tracks. This is because once you file for bankruptcy you are instantly protected by the Automatic Stay, which slams down around you like a protective bubble. The automatic stay prevents all lawsuit and court proceedings from going forward (except criminal cases and tax audits) unless the other party to the court case petitions the bankruptcy court to “lift the stay” and allow the other case to move forward.
However, the protection of the Automatic Stay is not 100% when it comes to divorce. There are two divorce-related exceptions to the Automatic Stay. First, the bankruptcy filing does not stop any actions for the establishment of paternity or for establishment or modification of an order of alimony, maintenance or support. This means that the family court can still make orders regarding alimony, maintenance or support even though one spouse has filed for bankruptcy.
The second exception allows the divorce court to collect alimony, maintenance or support from any property that is not property of the bankruptcy estate. This means that in a Chapter 7 case, the divorce court can collect from wages or assets earned or received AFTER the Chapter 7 is filed. Additionally, once the Chapter 7 discharge order enters (usually 3-5 months after filing) the automatic stay is lifted and the divorce case can proceed. In a Chapter 13 case, the automatic stay is in place for the entire Chapter 13 repayment period. However, once the Chapter 13 case is confirmed all property is again subject to collection for alimony, support and maintenance orders.
One more thing to understand about the Automatic Stay and divorce cases is that if the other side in the divorce case petitions the bankruptcy court to lift the automatic stay to allow the divorce to proceed, they will very likely win. This is because the case law supports allowing the divorce issues to be litigated in family court, not bankruptcy court. Because of this, filing bankruptcy will generally only stall, but not stop, a divorce case from going forward, or a contempt action in family court . Usually, the other side will fight to have the divorce move forward and the filing of bankruptcy will simply add time, costs and attorney fees in the divorce case as the other side files motions and expends legal time fighting the automatic stay.
Because of the complications to the divorce case that arise when a bankruptcy is filed during divorce, it is usually best to wait until final orders have entered in the family court before filing for bankruptcy. Not only does this approach minimize attorney fees in the divorce, it also has the potential for an ex-spouse to discharge some divorce-related debt that wouldn’t be possible if they filed for bankruptcy before final orders enter. This is because there is a type of divorce debt that CAN be discharged in Chapter 13 bankruptcy: property settlement orders.
Property settlements are very narrowly defined in bankruptcy. They cannot be in the nature of alimony or support in any way, shape or form. The bankruptcy court can look beyond the divorce decree at the circumstances surrounding the divorce in determining whether a debt is or property settlement or in the nature of support or alimony. The bankruptcy court will try to determine the intent of the parties in the divorce and will look at the financial situation of both parties as well as the number and frequency of payments and the actual language of the divorce decree. Some courts have found awards of attorney’s fees in divorce to be in the nature of support and not dischargeable in bankruptcy.
If you have been ordered to pay divorce debt that is a property settlement, such as an order to pay off your ex-spouse’s credit cards or other bills, you may be able to get rid of that debt in a bankruptcy. However, the only chapter of bankruptcy that allows this is Chapter 13. No divorce-related debts are dischargeable in Chapter 7. None.
Therefore, if you have a property settlement debt you want to analyze your eligibility for Chapter 13 and determine if it makes sense to file a Chapter 13 to potentially get rid of that debt. Often, filing a Chapter 13 to discharge property settlements awarded in divorce actions involves litigation within your bankruptcy. This is because the other side will often file a proceeding to have the debt declared non-dischargeable. In order to prevail you will need to fight that action and convince the court that the debt is for property settlement and not support or alimony.
Additionally, if the other side does not file an action in your bankruptcy to determine this, that does not mean you automatically get the debt discharged. Without a court order in the bankruptcy your ex-spouse can continue to enforce the property settlement order in state court. Unlike some claims in bankruptcy, the claim that divorce debts do not get discharged does not disappear once the bankruptcy is over. Without a court order declaring the debt to be property settlement the issue can come up again in further divorce proceedings. Therefore, if the other side doesn’t bring the action you may want to bring it yourself in the Chapter 13 in order to have some finality on the issue.
As this very lengthy blog post makes clear, bankruptcy and divorce are complicated. The legal issues involved can affect each other in many ways and not all family law or bankruptcy attorneys adequately understand this. If you have unmanageable debt and are considering divorce, involved in a pending divorce or have a divorce decree you should contact a bankruptcy attorney who understands divorce issues in bankruptcy. Make sure you find an attorney who offers a free consultation. If you are in Colorado, contact the attorneys of Wink & Wink for a free consultation and evaluation of your options.