Bankruptcy and Divorce: You Will Survive
It’s not a match made in heaven, but bankruptcy and divorce often go hand in hand. Many people who get divorced end up in dire financial straits and find no alternative but to file for bankruptcy to start over. Similarly, some couples who file for bankruptcy or are on their way to bankruptcy have suffered the immeasurable cost and stress of being heavily in debt and marriages strained beyond reconciliation.
If you are in the midst of a divorce and contemplating bankruptcy, it is highly recommended that you seek the advice of a bankruptcy attorney before finalizing the divorce because the divorce settlement agreement or equivalent court order will likely affect what you can and can’t do in your bankruptcy. It is important to understand how assets, debts, and obligations that are the subject of a divorce will be treated in a bankruptcy case.
The debt you can’t get rid of: the DSO
In bankruptcy, how the debt is characterized determines, in part, whether it is subject to “discharge” (the obligation to repay the debt is extinguished in bankruptcy). The bankruptcy code, 11 USC 523(a)(5) exempts a “domestic support obligation” or “DSO” from discharge. Pursuant to 11 USC 101, a DSO includes debts characterized as alimony, maintenance, or support created by a divorce decree, estate settlement agreement, or other similar court order. Therefore, how obligations are distributed in a divorce will dictate whether that obligation will be “dischargeable” in bankruptcy. Simply put, if the obligation arises because of alimony, it won’t; if it arises from liquidation of assets, it is more likely to be dischargeable.
In a divorce, the law of the state in which you live and file will dictate how the divorce court should act on the distribution of marital property. However, if a bankruptcy is filed while the divorce is in progress, the bankruptcy court will determine the equitable share of the property and has the power to “stay” a divorce court from proceeding with any property division determination. are owned, in whole or in part, by the person who filed for bankruptcy relief: the debtor. This means that timing is, again, key to knowing when it is best to file for bankruptcy when it comes to divorce because it will greatly affect the distribution of property under divorce.
In the divorce court setting, the husband and wife may choose to reach an amicable agreement with each other; If either party files for bankruptcy while the divorce is still pending, the determination on the division (and possible seizure and liquidation) of the jointly owned property will be made by the bankruptcy court, not the parties.
Like a lion on the prowl, so is the bankruptcy trustee on the prowl for assets
Another reason to make sure the divorce is finalized before filing for bankruptcy is the implication of the assets that are acquired in the bankruptcy estate. When a bankruptcy case is filed, that person’s entire legal and equitable interest in the property is placed in the hands of a court-appointed bankruptcy trustee. In Chapter 7 bankruptcy, the Trustee serves to determine if non-exempt assets exist for liquidation for the benefit of the bankruptcy debtor’s creditors. Similarly, in a Chapter 13 bankruptcy, the Trustee is interested in whether there are any non-exempt assets in order to determine whether the debtor has proposed a payment plan that meets the creditor’s “best interest” test. pursuant to 11 USC 1325(a)(4). Under either chapter of the filing, if a divorce is pending and assets are likely to be involved, the bankruptcy Trustee may hold the Estate open for the final divorce decree to see how the assets were distributed. This would, of course, mean prolonging the time the bankruptcy case is open. It could also result in the loss of assets awarded by the divorce court if those assets are not exempt under applicable bankruptcy law.
When you’re in a bad situation, the natural instinct is to get out of it as quickly as possible. Following this line of thinking, some people who are getting divorced and need to file for bankruptcy try to end up in one place. The well-informed person must realize that trying to do both at the same time is likely to have unforeseen consequences, some of which are detrimental to his best interests; therefore, the best practice is to finish one before the other.
You will survive the process, but you must realize and accept that it is a process: don’t put the cart before the horse. When in doubt, always consult a local solicitor for advice.