Bankruptcy and Divorce: Q & A

How Does Bankruptcy Affect a Divorce?

Family law and bankruptcy can often go hand-in-hand to make divorce a much tougher process to stomach. Upon splitting up, one or both spouses may not be able to pay the family debts, or one spouse may seek to use bankruptcy as a weapon to give him/her an advantage.

Bankruptcy issues in a divorce generally fall into three categories:

1. The payment of child support and alimony after a bankruptcy filing

2. The enforceability of a property settlement agreement after a bankruptcy filing

3. The payment of joint credit card debt if only one spouse files for bankruptcy

Section 523(a)(5) of the Bankruptcy Code now makes all support obligations non-dischargeable in all chapters.

My Spouse has just Filed for Bankruptcy in the Middle of Our Divorce Case. What Do I Do Now?

Living in California is expensive, and divorce can be even more so when bankruptcy is involved. A divorce can trigger a bankruptcy filing for a multitude of reasons, and it quite often turns into a supreme mess. There is no clear winner and loser in a divorce case, so all parties should try to achieve a compromise and reach a fair property settlement agreement. In many cases, a bankruptcy can help out both spouses if they joint file.

If an ex-spouse files for bankruptcy, the family court can still hear testimony and decide issues relating to support. However, the court requires stay relief for equitable distribution, which involves the bankruptcy court permitting the divorce case to continue. Basically, the family court won’t split up the family home, divide pensions, or apportion any stocks or mutual funds until it receives permission from the bankruptcy court.

If My Husband Files for Bankruptcy Can I Still Enforce the Terms of the Divorce Judgment?

Section 523(a)(5) of the Bankruptcy Code now makes all support obligations non-dischargeable in all chapters. In addition, all property settlement debts owed to a spouse, former spouse, or a debtor’s child are non-dischargeable in a Chapter 7. Therefore, a non-debtor spouse is no longer technically required to file an adversary complaint to block a debtor spouse from trying to bankrupt debt owed under a property settlement agreement. However, it still makes sense for a non-debtor spouse to file an adversary complaint. A non-debtor spouse should be completely certain that the debtor ex-spouse does not discharge marital debts owed under the agreement. Due caution should be exercised until the bankruptcy laws on these issues are settled.

The ability to pay and the balancing tests have been eliminated from Section 523(a)(15) of the Bankruptcy Code, and Section 523(c) of the Code was amended so a property settlement discharge proceeding is no longer required to be brought into the bankruptcy court. It is important to emphasize that these types of debts still remain dischargeable in a Chapter 13 case. Therefore, most future bankruptcy litigation over family law debts will be contested in a Chapter 13 case rather than a Chapter 7 case.

We are in the Middle of a Nasty Divorce and I was just Served with Foreclosure Papers. What Should I Do?

Once a divorce is filed, there are growing fears that the family will fall apart. It is a sad reality that many families simply can’t pay for the mortgage or other major expenses when they split up. Filing a Chapter 13 bankruptcy stops the foreclosure, and enables the family to propose a debt restructuring plan and a payment plan on the mortgage rearrangements. At the very least, a Chapter 13 bankruptcy will buy the family time to find a decent apartment within their means.

Alternatively, a Chapter 13 bankruptcy could give a family some time to put their home on the real estate market. A family receives the except equity in their home if it’s sold at a sheriff’s sale, but only after the sheriff’s fees, bank’s lawyer fees, and the mortgage are fully paid off. It is always recommended that an financially constrained family sells their home in a “distress sale” rather than loses it in a sheriff’s sale.

If I File for Bankruptcy, Will It Impact My IRA account, My Spouse’s IRA, Cash Value Life Insurance Accounts, or Jointly-Owned Land?

In general, filing for bankruptcy will not affect your spouse’s property. In a Chapter 7 bankruptcy, the Trustee will be able to take your owned property if it is not exempt. The Trustee can’t take your spouse’s property.

The answer is a little more complicated when jointly-owned property comes into play. The Trustee can take only your portion of the property or all of it depending on the nature of your ownership. Selling the jointly-owned property may be required to divide it between the joint owner and the Trustee.

You should be able to keep your SEP, IRA, and 401(k) plans. In many states, IRAs are exempt, save for deposits made within six months before filing. EISA plans are also protected if their documentation contains spendthrift protection.

In California, a life insurance’s cash value exemption is capped at a certain amount, provided you meet name the property beneficiaries and meet other requirements.

I Was Ordered to Pay for My Wife’s Lawyer Fees. Can I Wipe Them Out if I File for Bankruptcy?

Divorce can be a war of attrition. The family court often requires the husband to pay the wife’s counsel fees, which could be $10,000 or higher. This can definitely take a toll on someone’s morale and pocket.

It’s common to hear about ex-husbands filing for bankruptcy after a divorce is over, and often the husband will list the wife’s lawyer fees as a debt on his bankruptcy schedules. Consequently, lawyer’s fees as a dischargeable debt in bankruptcy become a big issue. The key question is whether the counsel fee debt is declared as a support obligation or property settlement claim.

The California Bankruptcy Court recently declared obligations to pay spousal support and attorney fees as non-dischargeable pursuant to 11 U.S.C. ยง 523(a)(5). Van Aken v. Van Aken, 2005 Fed. App. 0001 (6th Cir. 2005).

If an ex-husband attempts to discharge a counsel fee award, it is imperative that the wife files an adversary proceeding with the Bankruptcy Court. This request calls for a Court hearing over the dispute, and the Court decides whether the counsel fee award is support and non-dischargeable. Likewise, the Bankruptcy Court could determine the counsel fee award was a form of equitable distribution that can be discharged. The Court could also order the payment terms be restructured. It is important to note that if a non-debtor spouse ignores a spouse’s bankruptcy filing, disastrous results could ensure. No objection typically means the debtor spouse will successfully discharge a counsel fee obligation.