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.
Bankruptcy After Divorce
Here are few things you should know:
- 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.
- 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.
- 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.
- 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.
Can I Discharge Alimony or Child Support in Bankruptcy?
No. In Chapter 7 bankruptcy, child support and alimony are one of the few forms of debt that cannot be discharged. You will need to continue to make payments. While it’s possible that discharging other forms of debt can make it easier for you to pay child support, there is no way to discharge child support that is owed by filing for bankruptcy.
If you file for bankruptcy under Chapter 13 bankruptcy, you can roll the child support payments into your repayment plan theoretically making them easier to manage as you would have one lump sum payment to account for during the duration of your repayment.
Your Debt Is Part of Your Marital Estate
When you file for divorce, marital property is rolled into a marital estate and a determination is made as to who gets what property. On the other hand, debts are divided in the same way. You can use this during divorce negotiations to come up with an equitable solution, but the debt is separated in the same way that your marital property is.
There is one major difference, however. Once your marital estate is divided, the debts do not become the sole problem of one or the other spouse. If, in your divorce decree, you agree to take on a debt and indemnify your spouse against liability for that debt, you can discharge it in bankruptcy without it becoming the burden of your spouse.
To boil this down, there are two key concepts to understand:
- First, one ex-spouse filing for bankruptcy does not automatically discharge the other spouse’s portion of the debt (they can be held liable for the entirety of the debt); and
- Second, to prevent this from happening, the divorce decree must contain some language that puts the entirety of the debt on the shoulders of the party who will be filing for bankruptcy (if you want to discharge it).
If you or your spouse intends to file for bankruptcy after a divorce, you should discuss the potential consequences of the bankruptcy with them. In some cases, a spouse caught unawares can end up footing the bill for a joint debt even after the other spouse has declared bankruptcy. In all likelihood, you probably don’t want this.
Debt Repayment as Part of Child Support and Alimony
This is an often confusing scenario. When a divorce decree stipulates that, as part of one spouse’s support to the other, they must pay off a debt held jointly, what happens after they declare bankruptcy? It depends primarily on whether or not this is a property or a support arrangement.
If it is a support arrangement, the spouse filing for bankruptcy can discharge their obligation to repay the joint debt, but their obligation to pay their spouse support cannot be. Additionally, that discharged debt can become the burden of the other spouse. In this scenario, the only way that the spouse declaring bankruptcy can discharge the debt entirely would be if the other spouse also declared bankruptcy.
Further complicating matters, if the one spouse was ordered to pay off the debt as part of a property agreement, the debt cannot be discharged in Chapter 7 at all. In this case, if the debt was unsecured, a Chapter 13 bankruptcy may be able to discharge some or all of the debt depending on what other kinds of debts you owe and how much of a financial burden it puts on you in terms of your other financial obligations. Unsecured debt is treated as the lowest priority under Chapter 7.
Confused? You’re not alone. That’s why it’s imperative to have a skilled bankruptcy attorney go over all the potential consequences of filing for bankruptcy with you before you make the decision to file.
What About Filing Jointly Before Divorcing?
This can be the best option for spouses who have a lot of joint debt. In this case, there won’t be any surprises when it comes to one spouse filing while the other does not. The rules are clearer as well. If both spouses file for a joint Chapter 7 bankruptcy, they can discharge all of their marital debt together and then proceed to divorce without having to worry about dividing marital debt. On the other hand, both spouses will now have the bankruptcy on their credit report.
You Have a Lot of Choices to Make
Divorce complicates bankruptcy in a number of ways. Bankruptcy also complicates divorce. When you file for bankruptcy, you want to ensure that there is a substantial net gain for you as you will now have the burden of rebuilding your credit. You want to make sure that all of your debts are discharged and the chances of passing those debts to your ex-spouse are minimized. Allmand Law Firm, PLLC offers expert representation in matters of bankruptcy. We can help ensure you get the best result when you file and begin to prepare for your financial future.
Have More Questions About Bankruptcy After Divorce?
If you have any questions regarding bankruptcy after divorce, we are always there to answer your questions. Feel free to call us or contact us today.