How Bankruptcy Could Impact A Divorce Settlement

July 3rd, 2010 by Reed Allmand

Whether you’re the debtor considering bankruptcy or an ex-spouse of a debtor who is considering bankruptcy, any divorce settlement agreement made right before a bankruptcy filing could be impacted by the rules governing bankruptcy.  Here are few things you should know:

1. If an ex-spouse decides to file bankruptcy after a divorce settlement, their finances will be taken over by the bankruptcy trustee. The bankruptcy trustee will be responsible for managing the debtor’s assets and distributing payments to creditors.  An ex-spouse with a divorce settlement will be a claimant or creditor in the bankruptcy.
2. If the debtor filing bankruptcy has a home and the ex-spouse is a joint owner then the trustee will not distribute the non-filing ex-spouse’s half of the property to the creditors in the bankruptcy case.  However, if the ex-spouse who is not filing bankruptcy did not have an interest in the house, it may be difficult for them to extract any payments from a sell of the home. 
3. If an ex-spouse filing bankruptcy hides assets in order to avoid paying a divorce settlement or other debts, they can be fined and imprisoned for bankruptcy fraud if and when those assets are discovered.  It is rare that a debtor can hide assets successfully during bankruptcy.
4. If a debtor signs a divorce settlement with a non-filing ex-spouse six months or less before filing bankruptcy, the debt settlement may be reduced by the bankruptcy trustee.  However, if the debtor and the non-filing ex-spouse reach a divorce settlement six months or more before the bankruptcy filing, it is unlikely that the divorce settlement will be reduced during bankruptcy.