Divorce and Bankruptcy

Often, family law and bankruptcy seem to go together. Either upon splitting up, the spouses can't pay the family debts and jointly need bankruptcy relief, or one spouse seeks to use bankruptcy as a weapon against the other spouse, or the other spouse's lawyer.

Bankruptcy's effect on family law issues

For those divorcing or divorced, the bankruptcy issues generally fall into three categories:

1. Support:   discharge, payment and the automatic stay
   
2. Property settlement:   what happens to debts between spouses
   
3. Liability to others:   who is liable for the debts at divorce

Filing together

Sometimes, one or both spouses can benefit from a bankruptcy filing:

One spouse files

When only one files, the legal worlds of state family law and federal bankruptcy law may collide. The bankruptcy courts are left to sift through the wreckage.

Where there are non exempt assets, a bankruptcy filing by one spouse pulls all the community property into the bankruptcy estate and assures that the available assets are used to pay debts now. 

A spouse who has the benefit of an indemnity agreement in a divorce decree (a provision that requires the other spouse to pay certain debts or repay the benefited spouse if the creditor makes that spouse pay the debt) may be able to prevent the discharge of the indemnity agreement under 11 U.S.C. 523(a)(15).  There are no other bars to one spouse discharging  all liability for non tax/ non support debt.

Family Law & Bankruptcy FAQS

Bankruptcy and support claims

The Bankruptcy Code attempts to protect the rights of children and former spouses to collect support:  whether it is called family support, alimony, or child support, the bankruptcy code makes it non dischargeable in bankruptcy.   The recipient spouse does not have to do anything for the debt to be excluded from the discharge.

The automatic stay, which stops other court proceedings when a bankruptcy is filed, does not apply to actions to establish or modify a support order or to collect support from post petition wages.

Wage orders that deduct current support from the debtor's wages are not generally affected by the bankruptcy filing.  Wage orders that collect past due support arguably are stayed in Chapter 7 and certainly stayed in Chapter 13.

Also, support is a priority claim for purposes of payment from the estate.   Thus in a Chapter 13, payment of past due support is paid before unsecured creditors, and even before taxes. The recipient spouse must file a proof of claim to receive payment.  Chapter 13 frequently works well for both the paying spouse (who is protected from other creditors while paying back support) and for the recipient spouse ( who gets regular payments from the trustee made by the debtor voluntarily).

Bankruptcy and the division of property and debts in a pending divorce

The issues raised when one spouse in a divorce action files bankruptcy are complex and vary somewhat depending on the property and family laws of the state.  

In general, the filing of a bankruptcy stops all court proceedings against the debtor;  brings into the bankruptcy estate all property of the debtor and all community property of the debtor and his spouse;  and upon entry of a discharge, relieves the debtor of personal liability for all dischargeable debts.   

The family court cannot assign marital debts to the debtor after he has received a discharge and cannot make orders dividing the property of  the debtor while the property is property of the estate.  The family court can divide the property that the debtor exempts;  after the exemption is allowed, that exempt property is no longer property of the estate.  

The family court can continue to hear and decide issues relating to fixing support. Some courts will require an order from the bankruptcy court, specifically finding that motions to establish or modify support are outside the bankruptcy stay. 

If you become involved in such a proceeding, get advice from an experienced bankruptcy lawyer. 

Bankruptcy and enforcement of marital settlement agreements

The Bankruptcy Code recently made non support obligations created in connection with a divorce or separation nondischargeable in Chapter 7 if discharge of the obligation would harm the non debtor spouse more than it would benefit the debtor.  11 U.S.C. 523 (a)15. 

Unlike support obligations, which are non dischargeable without the necessity of action on the part of the recipient spouse, these marital separation obligations survive the bankruptcy only if the non debtor spouse files a timely action to except the debt from discharge.  

If no adversary proceeding is timely filed in the bankruptcy, these obligations are discharged.  Snooze, you lose. 

The case law on just what obligations fall into this category of potentially non dischargeable debts; who can bring the action; and which party has the burden of proof is still developing.  See a bankruptcy attorney immediately if you are the beneficiary of a property settlement agreement or an indemnity agreement with your former spouse. 

Effect of listing a marital debt on the schedules

Just because a creditor is listed by the debtor on the bankruptcy schedules does not make the creditor's claim dischargeable.  The debtor is required to list all debts on the schedules, even debts that are acknowledged to be non dischargeable.  

The dischargeability of the debt depends on the nature of the debt (support, property division, lien for equalizing payment, etc.).  Support is non dischargeable without action on the part of the receiving spouse.  

Other debts arising from a divorce, like property division and liability for the debts incurred to others during the marriage, require action on the part of the creditor/spouse if they are to survive the bankruptcy.  

If you have notice of the bankruptcy, whether from the court or through the grapevine, you are charged with finding out what is going on and taking steps to protect your interests, if necessary.