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 poor financial shape and find no alternative but to file for bankruptcy to start over. Similarly, some couples filing for bankruptcy or on the way to filing for bankruptcy have suffered the immeasurable cost and stress of being heavily in debt and marriages are strained beyond reconciliation.
If you are in the middle of a divorce and bankruptcy is being contemplated, it is highly recommended to seek the advice of a bankruptcy attorney before finalizing the divorce because the divorce settlement agreement or the equivalent of a court order will likely affect what you can and do cannot 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, the way 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 that are characterized as alimony, maintenance, or maintenance created by a divorce decree, estate settlement agreement, or other similar court order. Therefore, how liabilities are distributed in a divorce will dictate whether that liability will be “dischargeable” in bankruptcy. Simply put, if the obligation arises because of alimony, it won’t; if it arises from liquidation of goods, it has a better chance of being downloadable.
stamp ownership
In a divorce, the law of the state in which you live and file the lawsuit will dictate how the divorce court must act on the distribution of marital property. However, if a bankruptcy is filed while the divorce is ongoing, the bankruptcy court will determine the equitable share of the property and has the power to “stay” the divorce court from proceeding with any determination of property division that it is 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 a divorce because it will greatly affect the distribution of property under the divorce.
In the divorce court setting, the husband and wife may choose to come to an amicable agreement with each other; If either party files for bankruptcy while the divorce is still pending, it will be the bankruptcy court, not the parties, who will make the determination about the division (and possible seizure and liquidation) of jointly owned assets.
Like a lion on the prowl, so is the bankruptcy trustee stalking assets
Another reason to make sure the divorce is final before filing bankruptcy is the involvement of the assets being 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 whether there are non-exempt assets for liquidation for the benefit of the bankruptcy debtor’s creditors. Similarly, in a Chapter 13 bankruptcy, the Trustee is interested in knowing whether any non-exempt assets exist in order to determine whether the debtor has proposed a repayment plan that meets the “best interests of creditors” test of pursuant to 11 USC 1325(a)(4). Under either chapter of the filing, if there is a pending divorce and assets are likely to be involved, the Bankruptcy Trustee may hold the Final Decree of Divorce Estate open to see how the assets were distributed. This would, of course, mean prolonging the time that 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.
Conclution
When you’re in a bad situation, the natural instinct is to get out of it as soon 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 unintended 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. If in doubt, always consult a local attorney for advice.
