Bankruptcy and Divorce

Contemplating a divorce and a bankruptcy at the same time can be extremely stressful. However, these two legal actions can work together, instead of against one another, if planned properly. The first step is to find competent legal representation. It is unlikely that one attorney will handle both a divorce and bankruptcy because both are particularly specialized practices. However, good communication between the bankruptcy and divorce attorneys is vital.

In most cases, it is best to wait to file for bankruptcy until a divorce is final. Chapter 13 bankruptcy plans, which involve paying off a portion of debt over time, generally will not survive a divorce because the income of both spouses is no longer available. Either the plan will have to be split in two or abandoned. Also, a Chapter 7 petition might be more viable once it can be calculated on one spouse’s income after a divorce, instead of on the combined income beforehand. On the other hand, filing jointly for bankruptcy may simplify the divorce since all the property will have been divided and debts discharged.

Both bankruptcy and divorce involve, to some extent, the division and distribution of property. Bankruptcy is designed to allocate assets in favor of creditors, and divorce seeks an equitable division between the parties. The bankruptcy stay will stop, at least temporarily, any division of property ordered in a divorce settlement which is still unfinished, so it is best to make sure all property division is finalized before filing for bankruptcy. However, orders of a divorce court involving child custody and spousal or child support are not affected by a bankruptcy. It has long been understood that the bankruptcy courts should not be used as a way to modify or negate support orders. Also, if a property division is intended by a divorce decree to fund or serve as a means of spousal or child support, it will not be impeded by a bankruptcy filing in most cases. Additionally, any clause in a divorce decree that requires one spouse to pay the debts of the other can be enforced by the bankruptcy court in a later proceeding.

Another aspect of property division arises from the use of exemptions in bankruptcy calculations. Exemptions are established by state or federal law and set aside certain types of property up to a certain value, such as a primary residence, vehicle and household goods, so that they are not included in the list of assets which can be used to pay debts. Once such exemptions are confirmed by the bankruptcy court, it may be easier for the divorce court to divide them without fear of violating the automatic stay.

The balancing of divorce and bankruptcy will involve unique facts for each case. Honest communication with your attorneys and thoughtful planning will make these difficult situations a little easier to navigate.