It’s common for couples contemplating a divorce to consider filing bankruptcy at the same time. Given that difficulty managing debt is a leading cause of divorce and bankruptcy, it’s no wonder!
If you’re at the crossroads of dissolving your marriage and considering bankruptcy, there are four key things you should know.
The status of the divorce often determines when the bankruptcy is filed.
Before the divorce. Assuming the parties can qualify for a chapter 7 bankruptcy, a joint petition may be the best option. A joint petition allows for the marital debt to be eliminated in four months. Only certain non-dischargeable debt, like most taxes, would be left to be divided in the divorce.
Filing jointly has other benefits as well. It avoids duplication of effort and filings fees. It allows the parties to double their exemption amounts, which helps protect the marital property from creditors. It also narrows down the issues to be addressed in the divorce.
During the divorce. A joint filing can be performed in the middle of a divorce, but the parties must be able to communicate, work together, and stay on the same page for four months. When a bankruptcy is filed, the divorce court will put a temporary hold on the divorce as the court cannot divide the marital property until the bankruptcy case is concluded.
After the divorce. Sometimes it makes sense to wait until the divorce is final before filing bankruptcy. Once the divorce is final, each party has a clear understanding of what debt they are each responsible for. This also avoids the risk of receiving a discharge in bankruptcy, only to end up being ordered to pay a portion of the marital debt from the divorce.
Spousal maintenance and child support are not dischargeable.
Think filing bankruptcy will relieve you from paying spousal maintenance or child support? Think again.
Debts owed to a spouse or former spouse; a child or their parent, legal guardian, or responsible relative; or to a governmental unit that are in the nature of maintenance or support will survive your bankruptcy case.
However, in order for the debt to survive, it must be:
- due and owing to the ex-spouse,
- enforceable by the ex-spouse, and
- in the nature of support.
Ultimately, it’s for the bankruptcy court to decide whether the obligation is in the nature of support. It is not required to follow state law or the divorce court’s characterization of an award as a property settlement. But, the bankruptcy court will often examine the divorce court’s findings when making its decision.
Property settlement agreements are not dischargeable (usually).
Property division and non-support orders for the benefit of the spouse, such as hold-harmless orders, will survive the bankruptcy case. However, there is one big caveat: such orders can be discharged in a successful chapter 13 case.
A chapter 13 bankruptcy filing by one spouse can stop creditors from collecting from the other spouse (or co-debtor).
I haven’t mentioned much about filing for chapter 13 bankruptcy. This is primarily because a chapter 13 require all or a portion of the debt to be paid back over a three-to-five-year period. For many couples contemplating divorce, or in the middle of one, the thought of being tied to their spouse for another three-to-five years is unbearable.
I would be remiss, however, for not pointing out that one of the benefits of a chapter 13 is that a filing by one spouse can stop creditors from attempting to collect from a co-debtor, such as the other spouse or soon-to-be former spouse. A co-debtor is someone who is also liable for the debt, such as a co-signer on an auto loan, but didn’t elect to file bankruptcy. This co-debtor stay applies even if the bankruptcy continues after the divorce decree has been entered.
Navigating the crossroads of divorce and bankruptcy can be tricky, but an attorney experienced in divorce and bankruptcy can help show you the way. If you’d like to discuss your particular case in more detail, please feel free to contact me at (317) 695-1008 or via email at [email protected].
About Matthew Cree
Matthew Cree is an attorney and counselor at law focusing on bankruptcy and collection defense in Greenwood, Indiana. His philosophy is to be there with his client every step of the way and to make bankruptcy as stress-free as possible.