Financial problems are often cited as the highest stressors in marriage. A recent study found that it is considered the causative factor in a relatively low number of divorces. When divorce enters the picture, a couple’s money problems may be transformed into bankruptcy issues.
Bankruptcy issues that arise in the divorce context
Which should happen first, divorce or bankruptcy?
The answer to that question is different for every situation. If three conditions exist, taking joint bankruptcy first may very well be the quickest, most cost effective option for both parties and for both the bankruptcy and divorce cases. These conditions are:
- Both parties know that they will eventually make use of bankruptcy.
- There are very few assets that would be exempt under bankruptcy laws, and thus not that much property to be divided in the divorce.
- The parties are not so hostile that they cannot cooperate in the bankruptcy proceeding.
What if one spouse will not agree to a joint bankruptcy?
One spouse may file bankruptcy on his or her own. That spouse would be able to discharge the debt. Because both spouses are responsible for the debt incurred during marriage, the creditors would then simply pursue collection for the entire debt against the non-bankrupt spouse. A divorce court may not order the spouse who has discharged the debt to pay it, and a divorce court cannot keep creditors from pursuing the non-bankrupt spouse, since the divorce court has no say over the contract between the creditor and the debtor. The divorce court only has the ability to assign debts between the two spouses. In order to prevent this situation, the non-filing spouse may wish to join in the bankruptcy case.
What happens if one spouse starts bankruptcy in the middle of divorce?
If a bankruptcy is filed while a divorce action is pending, the financial matters of the divorce action would be stayed under the “automatic stay” provision in the bankruptcy code. This means that the divorce may not go forward until the bankruptcy case is over without permission from the bankruptcy court. Non-financial matters, such as child custody, needing to be resolved would not be stayed.
What if one ex-spouse takes bankruptcy after the divorce is final?
It often happens that one ex-spouse will take bankruptcy after the divorce. However, recent changes in the bankruptcy code keep the spouse from discharging in bankruptcy any obligations that are “in the nature of support.” Thus, clearly, the spouse would not be able to discharge such debts as back child support or spousal support.
Can one ex-spouse discharge an obligation to pay the other an amount ordered as part of the property division in the divorce?
Property division obligations are more open to discharge than obligations that are for support, however, if the ex-spouse objecting to discharge files that objection in the bankruptcy court and is able to show that the obligation is in the nature of support, then the debt could not be discharged.
Because of recent changes in the bankruptcy law, even if the obligation is purely property division, a bankruptcy court must first consider the debtor’s entire financial situation, to determine whether the debtor has the ability to cover the debt with income or property not necessary for his or her support and for the support of his or her dependents. If the debtor does have adequate income to pay the debt, the bankruptcy court must balance the benefit of paying the debt against the detrimental consequences to the other ex-spouse if the debt is not paid.
Are attorney fees dischargeable in bankruptcy?
If one spouse was ordered to pay an amount towards the other spouse’s attorney fees in a divorce or custody matter, it is likely that obligation will be considered in the nature of support, and will not be dischargeable.
Divorce or bankruptcy, taken alone, create complex issues. Individuals who find themselves potentially involved in both a bankruptcy and divorce would do well to consult an attorney who understands the intersecting issues and dynamics.
DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.