We opened this discussion to help those individuals who face a double-edged sword: managing a divorce in a deteriorating marriage and a bankruptcy with out-of-control debt.
In addition to your do-it-yourself divorce, you may also be insolvent and unable to pay your bills as they become due. Serious debt problems are an all-too-common occurrence these days, experienced by young adults, senior citizens, and seemingly everyone in between. We know that divorce is often a consequence of long-term financial strife in the home. When your mail includes nothing but collectors’ threats and demands for payment. When you avoid answering the telephone for fear it will be yet another bill collector on the line. When your bank account is being garnished or you are being sued for nonpayment, then filing consumer bankruptcy may be the best route to debt relief and broad protection from creditors.
Once you’ve made the decision to file for bankruptcy, you must decide on the best timing – that is, whether to file before your divorce, during your divorce, or after your divorce is final. Deciding when to file a petition in bankruptcy depends greatly upon your particular circumstances and reasonable objectives.
When to file a Chapter 7, Chapter 11, or Chapter 13 is a complicated question to answer. But the more educated you are about the intersection of bankruptcy with divorce, the better off you’ll be financially and emotionally. To help you decide on the best course of action in your particular situation, here is some useful bankruptcy information that may be influential in light of your divorce.
When Bankruptcy and Divorce Intersect, Carefully Weigh Your Options.
To recap our previous post, we addressed the following divorce-related bankruptcy questions:
1. What are the consequences of filing for bankruptcy as an individual versus filing a petition jointly with your spouse?
2. What effect does the Chapter 7 Means Test have on your reported aggregate income and bankruptcy filing status?
3. How does the automatic stay in bankruptcy affect a pending divorce?
We’ll continue now with more bankruptcy considerations to ponder.
4. Post-Divorce Bankruptcy:
Once your divorce is final, you cannot file jointly for bankruptcy with your former spouse. You need to appreciate how the divorce, particularly the division of assets and debts, affects your obligations to the creditors you had during the marriage.
Unpaid Marital Debts. In the divorce, the Court will assign certain debts to each party as part of the division of assets and debts. The divorce decree makes this division binding on you and your former spouse. If you fail to pay the mortgage, for example, your former spouse can pursue legal action against you for violating the terms of the divorce decree. Your marital creditors were not parties to your divorce and are not bound by a decree assigning which debt will be paid by which spouse. If you fail to pay on a marital debt, your creditor will skip over to your former spouse and attempt to collect from him or her. And vice versa.
Former Spouse Files for Bankruptcy. If your former spouse files for bankruptcy, he or she will seek a judicial discharge of the debts assigned in the divorce decree among others. A creditor who cannot collect from your ex in bankruptcy will come directly to you on any debt that arose during the marriage. This is simply because that creditor can hold either of you or both of you liable for payment on a debt. (We’re only referring to community obligations, not separate debts that are exclusively your former spouse’s concern.) If you believe your ex-spouse is heading for bankruptcy, be prepared for the unpaid community creditors to come back to you for payment. And, of course, the reverse is also true should you file for bankruptcy after your divorce is finalized.
5. Domestic Support Obligations (DSOs):
There is an important rule regarding bankruptcy discharges, regardless of which chapter protection is sought under the U.S. Bankruptcy Code. Domestic support obligations are not dischargeable in bankruptcy.
Child Support and Alimony. When there is an award of spousal support or child support in the divorce, that obligation cannot be discharged in bankruptcy. If you were ordered by the family law court to pay alimony, for example, then filing for bankruptcy will not eliminate that debt – it is a non-dischargeable debt that you will still have to pay post-bankruptcy. You might get debt relief from some support arrearages, however, if the bankruptcy judge approves installment payments as part of a repayment plan, but the DSO won’t be discharged. The same is true of child support or other family support obligations.
Naming the Obligation. The bankruptcy court is more concerned about the purpose and effect of these domestic support obligations, the substance, than it is about the official title as a “property settlement” or some other descriptive title used in the divorce. You can call the support what you like in the divorce, but if a so-called property settlement looks like alimony, walks like alimony, and talks like alimony, it is alimony in bankruptcy.
6. Bankruptcy Provisions in the Divorce Settlement Agreement:
You can include safeguards against bankruptcy in your marital settlement agreement for inclusion in the divorce decree to limit the potential impact of a post-divorce bankruptcy. To make sure you use correct wording and approach this situation properly, you may want to enroll now with the Online Divorce Coach so you have access to an Arizona licensed attorney.
Withstanding the Rigors of Bankruptcy and Divorce.
Financial pressures can strain an already distressed marriage, pushing it over the proverbial precipice. And when spouses separate, they immediately face the harsh financial reality of running two separate households on the same or less income. In marriages where only one spouse was employed, moving out alone for the first time without a steady income source can be financially devastating.
Before taking action, research more about the intersection of bankruptcy and divorce so you can make a calm, reasoned, and educated decision based on your particular financial circumstances. Lastly, you have the right to file for bankruptcy at any time and so does your spouse. Neither of you needs consent from the other to file individually. But if you should decide to file a voluntary bankruptcy petition together, you had better be able to cooperate and communicate with each other about your finances.