How Bankruptcy Affects Divorce Settlements
In addition to the emotional devastation that often accompanies the breakup of a marriage, one or both parties may also experience the devastation of their finances. The loss of a spouse's income can leave the other spouse unable to pay her living expenses, let alone debts. In such situations, a spouse may find it advantageous to file bankruptcy. While it may provide some relief to the declaring party, it complicates the divorce case.
Other People Are Reading
-
What Debts Are Not Dischargeable
-
A party cannot escape certain debts by filing for bankruptcy. Child support and spousal support obligations, for example, are undischargeable in both Chapter 7 and Chapter 13, as are tax debts and student loans. Property settlement debts incident to divorce may be dischargeable if a debtor can show that he cannot pay the debt and also maintain himself and his dependents, or that the benefit to the debtor of discharging the debt outweighs the harm caused to the other party by the discharge.
The Automatic Stay
-
Bankruptcy law provides for the immediate institution of an automatic stay that goes into affect as soon as a debtor files for protection. This will generally prevent an equitable distribution or community property action from going forward. The stay does not, however, prevent the other spouse from maintaining an action for paternity, child support, spousal support, or collecting on such obligations from property that is not part of the bankruptcy estate.
-
Lifting the Automatic Stay
-
Although the automatic stay temporarily stops an equitable distribution or community property action, the court can lift the stay upon motion of a party in some circumstances. A spouse may need to proceed against marital property that is not property of the bankruptcy estate, such as retirement accounts, to prevent them from being secreted or spent.
What Assets Are Protected
-
While a debtor's assets are generally considered property of the bankruptcy estate and therefore available for liquidation to pay creditors, some assets are protected, or exempt. Exempt assets include retirement accounts and certain amounts of value in real and personal property. These exemptions, set forth in 11 USC 522, are subject to change by Congress.
Effect on Other Parts of the Case
-
A state court cannot distribute debt to a party once that party receives a discharge of that debt from the federal bankruptcy court. The resulting burden on the spouse who may be left holding the bag on discharged joint debt can be considered by a court in deciding how much spousal support to award, if spousal support is at issue in the case. If the case was settled by means of an integrated separation and property settlement agreement or consent judgment, a party's discharge of debts in bankruptcy may justify setting aside the settlement.
-
References
- Divorceinfo: United States Bankruptcy Code - 11 USC 523(a)(15)
- Divorceinfo: Bankruptcy and Divorce
- Divorceinfo: United States Bankruptcy Code - 11 USC 362(a)
- Divorceinfo: United States Bankruptcy Code - 11 USC 362(b)
- Cornell University Law School: Bankruptcy
- Cornell University Law School: United States Bankruptcy Code - 11 USC 522
- Photo Credit Richard Ross/Photodisc/Getty Images
