It is unlikely that anyone living in the U.S. today does not know at least one person that has been divorced, and most know many more. The leading causes of divorce should not be particularly surprising to most people – incompatibility, infidelity, and financial problems – with a combination of two or more of these factors often working in tandem to make reconciliation nearly impossible. One of the potential fallouts of financial issues, specifically, is the effect of one or both spouses filing for bankruptcy on pending divorce cases and post-divorce support obligations. The top three reasons people file for bankruptcy are medical bills, unemployment, and excessive use of credit. Divorce, itself, is the fourth most cited reason.

Any of the top three reasons could conceivably strain a marriage, and although bankruptcy does impact a divorce proceeding, it may still be the best choice for a couple’s financial situation if there is no realistic way they could repay all the creditors who extended loans and/or credit cards. An overview of how the intersection of divorce and bankruptcy can affect the outcome of a divorce petition will follow below.     

Pending Divorce Petition

Filing for bankruptcy, in conjunction with asking a court to grant a divorce, will have no effect on child custody and child support decisions, but it will have a big influence on the division of the couple’s property. Once a bankruptcy petition is officially filed in bankruptcy court, all the debtor’s property becomes part of the bankruptcy estate, and an automatic stay goes into effect that prohibits any action to control and/or transfer the property away. This means that no property belonging to the person who filed for bankruptcy can be divided between spouses as part of a divorce while the bankruptcy case is pending. Further, since most property a person owns while married is considered joint property, the disposal of major assets, like the marital home, would be delayed.

A Chapter 7 bankruptcy is a liquidation of all non-exempt assets owned by the debtor, which the bankruptcy trustee is authorized to sell in order to pay creditors. The bankruptcy trustee has the authority to determine which property is part of the debtor’s estate, and can even sell jointly owned property if the other spouse cannot prove his/her interest in it. If the trustee decides the other spouse’s interest is not part of the bankruptcy estate, his/her share of the sale proceeds would be paid.

In Chapter 13 bankruptcies, property is not sold to pay creditors, but a repayment plan established to satisfy creditors is calculated based on the value of the non-exempt property owned by the debtor. The repayment plan can last from three to five years, which means the ex-spouse would have to receive permission from the bankruptcy court to divide any jointly-owned property in a divorce.

Post-Divorce Bankruptcy

If bankruptcy is filed after the divorce is finalized, the bankruptcy code has specific provisions that exclude certain obligations related to divorce from being discharged. Thus, the debtor will still be required to pay “domestic support obligations” and property granted to a former spouse as part of a settlement agreement or divorce decree even after the bankruptcy petition is processed and granted. Domestic support obligations are those intended to financially assist ex-spouses and children, such as alimony and child support. The obligation must originate in a separation agreement, divorce decree, or property settlement agreement executed before the bankruptcy was filed. The exception for property awarded to an ex-spouse as part of a settlement agreement is essentially a catch-all that is used to exclude any other obligations established as part of a divorce from discharge in bankruptcy. Note that both of these exceptions are only applicable in Chapter 7 bankruptcies.

Talk to a Lawyer

Divorce and bankruptcy are two major life events that most people would rather avoid, but sometimes, both are necessary. Because both legal processes affect the other, it is important to speak with an attorney who is knowledgeable in both areas of the law. Christopher L. Arrington, representing clients in the Indianapolis area, handles both divorce and bankruptcy, and can help you work through this transition. Contact him to schedule an appointment.