The sad truth is that money troubles have torn apart many marriages. If you and your spouse have filed jointly for Chapter 13 bankruptcy, the court looks at you -- and your case -- as a single legal entity, even if you want to put as much legal distance between each other as possible. This gives rise to certain complications with both your divorce and your bankruptcy case. Even if you filed for Chapter 13 without your spouse, it can cause some wrinkles.
Include the Repayment Plan in Your Divorce Settlement
The bankruptcy court doesn’t care if you divorce, even if you’ve filed jointly for Chapter 13. All the judge and your trustee care about is that your plan payments keep rolling in. If your divorce is amicable, you can negotiate how much each of you will contribute to the payments after the divorce and go your separate ways. Just make sure you include the terms for your Chapter 13 payments in your marital settlement agreement so they’re enforceable.
If your divorce is so acrimonious it’s unlikely you’ll reach a marital settlement agreement, you can ask the judge to address your Chapter 13 payments when he rules on marital property and debt settlement. Terms for continuing Chapter 13 payments can be included in your decree.
Your bankruptcy might slow down your divorce, according to the law firm of Shaev & Fleischman. When you file for any chapter of bankruptcy, your assets become part of your bankruptcy estate, technically under the control of the bankruptcy court. You might not be able to transfer marital assets from one spouse to the other as part of your settlement without approval from the bankruptcy court.
Bifurcate Your Bankruptcy
If you filed for bankruptcy jointly but there’s no possibility that you and your ex can work together for another few years to finish off your Chapter 13 plan, you can file a motion asking the bankruptcy court to bifurcate your case. This effectively turns your joint Chapter 13 into two individual Chapter 13 cases, according to Shaev & Fleischman. The debts can be divided and each of you can make payments based on your own incomes, or you might decide to convert your case to a Chapter 7 instead. It’s up to you and the court now; you can proceed post-divorce without your ex’s involvement.
Converting to Chapter 7
Some married debtors are forced to file for Chapter 13 because their joint incomes are too great to allow them to pass the Chapter 7 means test: Together, they have enough available income to pay off at least a portion of their unsecured debts. After you bifurcate your case, only your own income is ascribed to you. You might now be able to pass the means test and convert to Chapter 7, according to Duncan Law in North Carolina.
The trustee will liquidate your nonexempt debts in Chapter 7 to pay off as much of your debt as possible, and you’ll receive a discharge. This means your bankruptcy is over, allowing you to move on and put your marriage and all its issues behind you. Even if you and your spouse don’t bifurcate your bankruptcy case, the added living expenses of residing in two separate households can affect passing the means test, too. You might be able to convert your case jointly.
If you filed for Chapter 13 because you wanted to save property, such as your home or auto, you run the risk of losing these assets in Chapter 7 if you have too much equity in them.
Modifying Your Plan
You might also file a motion in your bankruptcy case asking the judge to modify your Chapter 13 payments. Your increased post-divorce living expenses will probably take away from the joint disposable income you’ve been using to fund your Chapter 13 plan. This means there’s less money available to your creditors, so your Chapter 13 payments may go down to reflect this. In fact, it might be impossible for you to keep up with the original payments now that you're living apart and sustaining two separate households.
But Bankrate warns this isn’t always possible. It depends on the nature of your debts. Priority debts -- things like past-due family support obligations, taxes and past-due payments to secured creditors -- must be paid off in full in your plan. You must commit at least as much disposable income to the plan as is necessary to cover these, so if most of your debts are priority, you may not have much wiggle room to lower your payments. If your debts are predominantly unsecured, however, a modification may be a possibility. Unsecured creditors don't typically receive 100 percent of what they're owed.