Separation & Bankruptcy
The breakup of a marriage brings about devastation on many levels of a person's life, including his financial condition. A couple living paycheck to paycheck on two incomes may find themselves unable to pay for everything once they add the expense of maintaining a new household. While the United States Bankruptcy Code may provide some protection for the financially distressed, parties should understand how bankruptcy interacts with separation prior to deciding whether to file.
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What Bankruptcy Doesn't Do
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When a party files for bankruptcy, an automatic stay goes into effect that temporarily halts all efforts by the party's creditors to collect on their claims. Under the United States Bankruptcy code, however, the automatic stay does not apply to actions for spousal or child support or attempts to collect past due spousal or child support from property of the debtor that does not constitute property of the bankruptcy estate. Any discharge that the debtor eventually obtains likewise cannot include current or past due support for one's ex-spouse or children. Chapter seven bankruptcies also cannot discharge marital debts, although a Chapter 13 can.
Effect on Equitable Distribution and Community Property
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While a Chapter seven discharge cannot dispose of a party's obligations on marital debt, it can free up more of that party's monthly income to assist the other with servicing marital debt in her name solely. If the party elects to file Chapter 13 bankruptcy and manages to avoid some or all of the joint debt, that party may receive a smaller share of the marital estate, and a family court may order the bankrupt spouse to transfer separate property or property that is exempt under the bankruptcy code to satisfy a division of the estate.
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Effect on Separation Agreements or Court Orders
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If a party obtains a discharge of marital debts distributed to him under a separation agreement or court order, the other party may seek to set aside the agreement or modify the court order. Often, property and debt resolutions are inextricably interwined with provisions on spousal support, and a bankruptcy can create a situation that demands modification.
Effect on Child Support and Alimony
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Although bankruptcy cannot stop a child or spousal support action, it can influence the decision of a court when it comes time to set an amount of support. The bankrupt spouse's avoidance of marital debt obligations may provide the basis for an upward deviation from the state child support guidelines. In spousal support, the other party's bankruptcy may create a situation where a formerly solvent spouse is now unable to meet her monthly expenses without receiving monthly support from the other. Likewise, a bankrupt spouse that may have been eligible to receive alimony before the bankruptcy may no longer qualify as a dependent spouse for alimony purposes after receiving a discharge of her debts.
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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 Bankrupt. Businessman with empty pockets (with clipping paths) . image by Vitaliy Pakhnyushchyy from Fotolia.com
