Divorce is a naturally challenging process due to the emotional and financial factors involved. Making the dissolution of a marriage more complicated is the fact that you and/or your spouse also plan to file for bankruptcy.
Divorce and bankruptcy have major effects on each other when it comes to your personal finances and property. A few tips may help you to navigate both a divorce and bankruptcy filing prudently in Arizona.
What happens to my property during bankruptcy?
Arizona is a community property state. In other words, when two spouses choose to divorce, the court will divide their property equally. This is the opposite of what happens in an equitable distribution state, where a judge determines a fair, or equitable, way in which to split the property.
When you and/or your spouse file for bankruptcy, all community property — assets that you acquired or purchased while married — will become part of your bankruptcy estate. This estate is essentially all property owned when the bankruptcy filing occurs. Thus, your community property will be available for paying debts as part of the bankruptcy process.
What steps do the courts take?
Following the bankruptcy filing, an automatic stay will keep creditors from trying to collect on the majority of your debts. However, you can still ask the divorce court to require your future ex to pay alimony or child support.
After the bankruptcy court determines that certain property should not be included in your bankruptcy estate — in other words, it is exempt — the divorce court will divide this property between you and your spouse. The following types of property are exempt according to federal law:
- Retirement funds, such as 401(k)s and pensions
- A specific dollar amount for a car
- A specific dollar amount for your residence
What happens to my debt?
Any debts associated with your property settlement are non-dischargeable, so if you filed for bankruptcy, you cannot have these debts wiped out. However, the bankruptcy court can eliminate these debts for you if you can prove the following:
- That eliminating the debt would benefit you in a way that outweighs the negative consequences your child or former spouse would experience due to nonpayment
- That you simply cannot pay the debt while taking care of yourself and your dependents
Pursuing a divorce property settlement during bankruptcy can be complicated, but it is still possible with an applied understanding of divorce and bankruptcy law. An attorney who has experience with both of these legal areas can significantly increase your odds of achieving the best possible outcome for your particular circumstances.