Many times divorces and financial hardship go hand in hand. Just as financial difficulties lead to divorce or when couples split and separate you now have two households resulting in increased expenses and increased financial burden. Furthermore, divorces result typically in high attorney fees for both the husband and wife leading to further money problems. There are many difficult legal issues that must be analyzed before filing for bankruptcy during divorce. Careful planning and strategy are critical.
Before filing for bankruptcy during divorce, you have to consider some of these filing issues:
- Which should come first, the divorce or the bankruptcy?
- Will asset distribution in divorce effect or be affected by the filing of the divorce or bankruptcy first?
- How will assets be liquidated or will they be liquidated in a bankruptcy?
- How will the distribution of the assets occur, including the marital home, investment real estate and family cabins, boats, jewelry, collectibles, stocks and bonds, bank accounts and household goods?
- Who will get what assets or money?
- What will happen to retirement assets?
- Can I use bankruptcy to catch up on child support or alimony that I have fallen behind on?
- Should a Chapter 7, Chapter 13 or Chapter 11 be filed?
- What if the Divorce Judgment is already entered and I file bankruptcy after?
- What if a house or other asset is ordered to be sold in a divorce and one of the divorcing spouses files bankruptcy?
- How does the automatic stay in bankruptcy affect a pending bankruptcy case?
- Can I save my house with bankruptcy if a divorce is pending?
Every marriage and financial situation is unique and must be analyzed specifically. There is no clear answer when it comes to coordination of divorce and bankruptcy. Divorce and bankruptcy cases create complicated legal issues that require detailed analysis by a qualified bankruptcy lawyer and family law attorney. The challenges become more difficult if one spouse does not wish to cooperate with divorce or bankruptcy; this compounded difficult situation happens often. It is important to do your research and have any bankruptcy-related questions answered. You should speak to a bankruptcy and divorce lawyer as soon as possible even if one of the spouses does not wish to cooperate.
Dischargeability of Marital Debt in Bankruptcy During Divorce
Although most debts can be discharged or wiped out, 11 U.S.C. § 523 of the Bankruptcy Code provides that certain types of debts are non-dischargeable and remain liabilities of the debtor after the case is over. The “exceptions to discharge” in divorce cases are found in Section 523(a)(5) and (a)(15), which provide in relevant part as follows:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(5) for a domestic support obligation [see definition below];
(15) to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit;
(c) (1) … the debtor shall be discharged from a debt of a kind specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6), as the case may be, of subsection (a) of this section.
11 U.S.C. § 101(14A) defines what a “domestic support obligation” is: (a) a debt owed to or recoverable by a spouse, former spouse, or child of a debtor or such child’s parent, legal guardian, or responsible relative, or a governmental unit; (b) in the nature of alimony, maintenance, or support of such spouse, former spouse or child, without regard to whether such debt is expressly so designated; (c) established under a separation agreement, divorce decree or property settlement agreement, or an order of a court of record; and (d) not assigned other than for collection purposes.
Another issue that arises in bankruptcy and divorce is where one spouse is in debt and another is not. If in the divorce one spouse agrees to pay a debt of another spouse this may be deemed to be a domestic support obligation and then the spouse filing bankruptcy cannot wipe it out even though that spouse was not on the debt in the first place. Thus, it is critical how the divorce settlement agreement is drafted.
What Bankruptcy to File if Divorce is Involved
With a divorce and bankruptcy issue, the analysis of whether to file chapter 7 or chapter 13 may be involved. Chapter 7 is usually quick and much easier. Chapter 7, is most times the preferable chapter, where you have a bankruptcy and divorce going on at the approximate same time. By contrast, Chapter 13 is more difficult where you have a bankruptcy and divorce and can go as long as a five year or 60-month plan. Chapter 13, however, may be needed to restructure a mortgage to save a house or the income may be too high to qualify for a Chapter 7. This issue must be looked at depending on the particular facts of that divorce situation and what works best.
If your debts are too high you may have to file a Chapter 11 instead of Chapter 13. This would be rare but with the ever-increasing debt out there, sometimes a divorcing spouse may have debts that exceed the limits in Chapter 13.
In addition, chapter 13 can be used to catch up on child support or alimony that is behind over a 60-month plan. Therefore, a spouse behind on those obligations can avoid getting in trouble or even being arrested for not paying those obligations as long as that spouse proposes a reasonable plan to catch up over 5 years in Chapter 13.
Please keep in mind that if the divorce is filed first and the state court enters an order completing the divorce, all child support, maintenance, and property decisions are recognized by the bankruptcy court and held to be non-dischargeable in a Chapter 7 case. More complicated issues may arise, however, if the divorce has not yet started or is in the process when one of the two parties to the divorce file bankruptcy. Chapter 13 cases also have different dischargeability rules than in Chapter 7.
The Bankruptcy Stay and a Pending Divorce
Under 11 U.S.C. Section 362, all pending actions are automatically stayed or stopped if a bankruptcy has been filed. Thus, if a divorce has not been finalized and is pending, a bankruptcy filing by one of the spouses stops the divorce case. If beneficial, a motion to vacate the bankruptcy stay can be filed to continue with the divorce case by the spouse not filing. On the other hand, one of the spouses may want the divorce action to be stayed or stopped during the divorce so that this may be a good strategy depending on the issues involved.
The bankruptcy court will usually not allow assets to be sold while the bankruptcy case is pending and a divorce is pending. Whether an asset will be sold and will be kept in the bankruptcy case or not will depend upon whether there is equity in the asset, whether it is exempt or not, whether the bankruptcy trustee is pursuing the asset, whether there is a plan to sell or save the asset, and fairness to creditors of the estate. Some of the most complicated legal issues occur when there are non-exempt assets, a pending divorce and then bankruptcy is filed. It is better to strategically plan these issues out ahead of a bankruptcy filing.
For bankruptcy and divorce questions, contact the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP at 888-412-5091. We provide a free consultation in our offices in Wayne, Newark, Hackensack, and Hoboken, New Jersey. Call to schedule your appointment.
John J Scura III is a Partner at Scura, Wigfield, Heyer, Stevens & Cammarota, LLP. www.scura.com