Bankruptcy and Divorce
Bankruptcies and divorces have serious impacts on each other, especially with respect to your property and personal finances. Questions arise such as:
- Should we file prior to getting divorced?
- What if I can't wait for the bankruptcy and need to get a divorce, or physically separate, from my spouse now?
- We're ready to get a divorce. I want to file bankruptcy before the divorce, by my wife doesn't. Can I force her to file a bankruptcy petition?
- If my ex-spouse and I agree to file bankruptcy petitions before we file for divorce, should we file a joint petition and use one lawyer, or should we get separate lawyers?
- As part of our divorce, if we agree to split the debts equally, can I later file a bankruptcy petition and get rid of my debts and my ex-spouse's debts?
- After the divorce, my ex-spouse filed for bankruptcy and now the creditors he was ordered to pay are coming after me. What do I do?
Effect of Bankruptcy on Divorce
When one or both spouses file bankruptcy, all of the community property, that is, property that was bought or acquired during the course of the marriage, becomes a part of the bankruptcy estate and is available to pay debts. The bankruptcy estate is simply all of your property that you own at the time the bankruptcy is filed.
When you or your spouse file a bankruptcy, an automatic stay immediately prevents creditors from collecting on most debts; however, the automatic stay doesn't prevent you from asking the divorce court to order your spouse to pay child support or alimony.
Once a bankruptcy court decides property is "exempt," that is, it's not part of the bankruptcy estate and so it's not available to be sold to pay debts, the divorce court can then divide that property. Property exemptions are defined not only by federal law (the "Bankruptcy Code"), but also by the laws of the state in which the bankruptcy is filed.
Some examples of federal exemptions include:
- A specified dollar amount for real property that's for his or her residence, and
- A specified dollar amount for one motor vehicle, such as your primary car
- Pensions, 401ks or other retirement.
Property Settlements and Bankruptcy
Negotiating a property settlement in the midst of bankruptcy is complicated. Debts related to a property settlement are presumed to be "nondischargeable" in bankruptcy, meaning that the person who files bankruptcy can't have those debts wiped out and must still be responsible for them. But the bankruptcy court will wipe out those debts if the person filing for bankruptcy can show:
- That he or she can't pay the debt and still take care of him or herself and any dependents, or
- That wiping out the debt would result in a benefit to the person filing the bankruptcy that outweighs any harm done to his or her former spouse or child by nonpayment.
If you think your spouse is contemplating bankruptcy after your divorce is final, you'll want to draft your property settlement in such a way that your spouse's obligation looks like a support obligation instead of a property settlement because support obligations are more difficult to have discharged.
Questions that our courts answer in deciding what is support and what is a property settlement? Include the following:
- Does the obligation terminate or reduce with the occurrence of certain events, like remarriage or a child turning 18?
- Is the obligation in installments or a lump sum?
- Are there minor children?
- What's the relative health and education of the parties?
- Was there a need for support at the time of the divorce?
If your bankruptcy hasn't been filed yet, these distinctions and problems probably won't effect you. For many bankruptcies filed on or after October 17, 2005, any obligation between former spouses can't be discharged in bankruptcy. So, a spouse with an alimony and/or child support obligation can't have that obligation discharged in bankruptcy if the bankruptcy petition was filed on or after October 17, 2005.
Property Liens
One way to protect yourself in a divorce negotiation if you think your spouse may be contemplating bankruptcy in the future is to take a security lien as a backup to debts your spouse is to pay you after the divorce. The lien should be on property your spouse is to be awarded in the divorce. Thus, if your spouse later asks the bankruptcy court to discharge the debt he or she is supposed to pay, you can seize the property to pay the debt.
Indemnity Clauses
You can also protect yourself by having a "hold harmless" or "indemnity" clause written into your Decree. Indemnity clauses require your spouse to pay certain debts or repay you if a creditor makes you pay the debt. If your ex-spouse later files bankruptcy, you can ask the bankruptcy court to enforce the indemnity agreement. While an indemnity agreement won't guarantee you'll get paid, it's one more factor for the bankruptcy judge to consider.
Using My Financial Background to Your Benefit
As you can see, the intertwined issues of divorce and bankruptcy are confusing at best, and highly damaging at worst. If you find yourself in this position, it makes sense to find a lawyer who can help you with all these issues.
With an MBA in finance and an LL.M. (post law degree) in taxation, I have the background to carefully analyze your and your spouse's financial circumstances in order to give you skilled, personalized advice about your divorce and bankruptcy options.
Whether you are considering filing for bankruptcy before your divorce, during your divorce or if you are concerned that your spouse may be taking advantage of the bankruptcy process, don't hesitate to contact me to discuss what I can do to aggressively protect your rights.
