Many times, one or both spouses
who go through a divorce file or consider filing
bankruptcy. Financial pressures often are part of
the factors that led up to the divorce. The expense
of setting up two households, trying to maintain the same
standard of living for the sake of children, and having to
rely on or pay child support and alimony also contribute
to the financial difficulties spouses face after a
divorce.
Bankruptcy after divorce is
often a real possibility. The Bankruptcy Act of 2005
significantly changed the effect of bankruptcy on
divorce. Going through a divorce without knowing how
bankruptcy could affect the divorce terms could result in
unpleasant and damaging surprises. We believe you
should be prepared ahead of time.
On the other hand, sometimes
it may be advisable to file bankruptcy jointly before your
divorce goes through.
Our experience at Serrano
& Serrano with both bankruptcy and divorce helps us
understand the problems you may be facing in a way that
attorneys who handle just bankruptcy or divorce
cannot. You can rely on our experience and
understanding of both areas of law to guide you through
this difficult time. We will explain your options
and help you make the choices that best serve you and your
family.
We are providing you with some
general information from three points of view: (1)
you owe your spouse money after your divorce and you file for bankruptcy, (2)
your ex-spouse owes you money after your divorce and your ex-spouse files for bankruptcy,
and (3) you and your ex-spouse both
file for bankruptcy before the divorce.
Because of the significant
effect that a bankruptcy can have on the terms of a
divorce, we do not recommend that you file for bankruptcy
individually before your divorce goes through without
speaking to an attorney who knows both areas of law.
This page provides information
about the relationship between divorce and the most common
forms of bankruptcy, Chapter 7 Bankruptcy, in which you
cancel the debts that the law allows you to cancel, and Chapter 13
Bankruptcy, which is typically filed to get caught up
on overdue mortgage or car payments.
(Numbers in blue refer to Bankruptcy
Code sections.)
If You
File Bankruptcy and Owe Your Ex-Spouse Money
The automatic
stay, which immediately stops creditors
from trying to collect on their debts when you file
bankruptcy, does not suspend your obligation to keep
paying child support or alimony. The stay also will
not stop a motion for contempt or other efforts to collect
support or alimony. §362(b)(2)
Filing bankruptcy will not discharge
(cancel) your debt for overdue child support or
alimony. In fact, a major change made by the 2005
Bankruptcy Act is that debts for support and alimony
are now first priority. If any of your assets are
available to pay your creditors, your ex-spouse will get
paid before anyone else is paid, even before taxes are
paid. §523(a)(5);
§507(a)(1)
The new law gives your ex-spouse certain
other rights that other creditors do not have.
Assets that you can protect from all other creditors
(called exempting)
cannot be protected from being used to pay overdue support
or alimony (although this is being challenged in court
cases). Liens placed against your property by
the divorce court for overdue support or alimony cannot be
cancelled like they can for other debts. §522
In another
significant change, debts from a property settlement in a
divorce cannot be cancelled in a Chapter 7
Bankruptcy. (Previously, in deciding whether to
cancel property settlement debts, a bankruptcy court would
see which spouse would have the greatest hardship if the
debts were cancelled. Now, such debts are never
cancelled in Chapter 7.) §523(a)(15)
Property settlement debts may
still be cancelled in Chapter
13 Bankruptcy and
it appears a balancing of the hardships test would still
apply. Alimony may even be cancelled in Chapter 13
if the bankruptcy judge can be convinced that the alimony
is really property division and not spousal support.
(See the FAQ page alimony section.) §1328(a)(2)
The new law protects alimony
and child support in Chapter 13 by requiring that all your
payments are current before the court will confirm your
repayment Plan. Your case will be dismissed
or converted
to Chapter 7 if you fall behind in your support or alimony
payments and cannot confirm your plan. Your
repayment plan must provide for any support or alimony you
owed your ex-spouse when you filed bankruptcy. To
get your Chapter 13 discharge, you will have to certify
that your payments are current. §1307(a)(11); §1325(a)(8)
When you file either a Chapter
7 or 13 bankruptcy, the trustee
(the person who reviews your case for the court) must
notify your ex-spouse that you have filed and provide
information to help him or her collect support through the
state bureau of child support. When you receive your
discharge, the trustee again notifies your ex-spouse and
provides your address and your employer's name and
address. §704(c);
§1302(d)
If Your
Ex-Spouse Files for Bankruptcy and Owes You Money
If your ex-spouse files a Chapter 7
Bankruptcy or a Chapter
13 Bankruptcy, the trustee
(the person who reviews your case for the court) must
notify you about the filing and provide you with
information to help you collect support through the state
bureau of child support. When you are notified, you
should immediately file a Proof
of Claim form with the bankruptcy court to
declare how much your ex-spouse owes you for alimony,
child support or a property settlement. If you do
not file the form on time, you may not get paid,
especially if your are due money for a property settlement
and your ex-spouse has filed under Chapter 13. §704(c); §1302(d);
§501; §502
Your ex-spouse's filing of
bankruptcy does not suspend his or her obligation to keep
paying your child support or alimony. The automatic
stay, which immediately stops your ex-spouse's creditors
from trying to collect on their debts, does not apply to
money owed you for support or alimony. You can
pursue motions for contempt or any other efforts to
collect support or alimony. §362(b)(2)
Your ex-spouse cannot discharge
(cancel) his or her debt to you for overdue child support
or alimony. Under the new 2005
Bankruptcy Act, debts for support and alimony are now
first priority. This means you will get paid before
anyone else if any of your ex-spouse's assets are
available to pay creditors. §523(a)(5); §507(a)(1)
The new law gives certain other rights to
your ex-spouses property that other creditors do not
have. Assets that can be protected from all other
creditors (called exempting) cannot be protected from
being used to pay overdue support or alimony (although
this is being challenged in court cases). If you
place a lien
against your ex-spouse's for overdue support or alimony,
the lien cannot be cancelled like it can for other
debts. §522
In another
significant change, debts from a property settlement in a
divorce cannot be cancelled in a Chapter 7
Bankruptcy. (Previously, in deciding whether to
cancel property settlement debts, a bankruptcy court would
see which spouse would have the greatest hardship if the
debts were cancelled. Now, such debts are never
cancelled in Chapter 7.) §523(a)(15)
Your ex-spouse may still
cancel debts he or she owes you under a property
settlement if he or she filed a Chapter
13 Bankruptcy. It
appears the court would still apply a balancing of the
hardships test.. Alimony may even be cancelled in
Chapter 13 if the bankruptcy judge can be convinced that
the alimony is really property division and not necessary
for your own support. (See the FAQ page alimony
section.) §1328(a)(2)
The new law protects alimony
and child support in Chapter 13 by requiring that all
payments be current before the court will confirm your
ex-spouse's repayment Plan.
The case will be dismissed or converted
to Chapter 7 if he or she falls behind in your support or
alimony payments and cannot confirm the plan. The
repayment plan must provide for any support or alimony
that your ex-spouse owed you when the bankruptcy was
filed. To get a Chapter 13 discharge,
your ex-spouse will have to certify that all support and
alimony payments are current. §1307(a)(11); §1325(a)(8)
When your ex-spouses receives the bankruptcy
discharge, the trustee will let you know and will give you
your ex-spouse's address and employer's name and
address. §704(c);
§1302(d)
If Your
Both File for Bankruptcy
Under certain conditions,
filing a joint Chapter
7 Bankruptcy before your divorce
goes through might be a very good idea, especially if
there will not be enough money to maintain two households
and pay off your debts. Filing jointly before
divorce has the following advantages:
