Divorce and Bankruptcy: Considerations for divorcing families with bankruptcy questions

Debts owed to creditors are collectable despite a divorce. Even if there is an agreement for the parties to divorce to split some or all the debts, the creditor’s legal right to collect on a debt remains despite a family court order dividing responsibility for debts. A collector can proceed on debt collection. Collectors may file lawsuits to lien and foreclose on properties as well as attempt to seize other assets and garnish wages. A bankruptcy can stop that collection activity but a divorce proceeding cannot stop the collector.

The automatic stay provision of the Bankruptcy Code can stop all collectors from pursuing collection of a debt during an active Chapter 7 or Chapter 13 bankruptcy. For more about stopping creditors, please read our article, Examples of the automatic stay and how it operates in bankruptcy law.

A divorce and family law court will distribute marital assets and debts, some of which are dischargeable.

In a divorce case, the family law court reviews all the assets and liabilities shared in a marriage. Using the family code property division laws, a share of assets and debts are awarded to each spouse. After a divorce, a spouse may have significant assets, but too often, there are spouses who leave divorce owing debt. In some cases, the spouse ordered to pay debts does not and leaves the other spouse on the hook for the debt and still exposed to the collectors, despite the family court’s orders. It is important to note that some of the assets kept or divided in divorce include 401K accounts, which are excluded from a bankruptcy case. Therefore, it is never wise to invade the 401K to pay divorce debts.

Financial liabilities such as mortgages, car loans, credit card debt, bank loans and money court judgments can be eliminated through a Chapter 7 (full discharge) or a Chapter 13 (partial discharge and repayment) bankruptcy case.

Spousal alimony, maintenance and child support cannot be discharged in bankruptcy, in most cases.

After a divorce court distributes assets and debts, child support and spousal alimony, called maintenance by the courts, is awarded in a fixed amount and duration in most cases, and you cannot eliminate the financial obligation through bankruptcy. As a general rule alimony, maintenance, and/or support are not dischargeable divorce and separation agreements. There are exceptions however, where alimony, maintenance or support payments can be discharged:

(A) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor and, if the debtor is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business; or

(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor.[i]

For best results, an experienced bankruptcy attorney can advise as to all your best options.

There may be further and more detailed questions about when to file a bankruptcy, before or after the divorce, and there may be other legal issues and outcomes that should be considered. An experienced bankruptcy attorney has worked with many clients with divorce actions before or after a bankruptcy. Joseph Wrobel and the associate attorneys at Joseph Wrobel, Ltd., can help get the conversation going with a free review and assessment of your options.

Joseph Wrobel, Ltd. helps people get control of their finances and a fresh start at financial freedom. The firm’s website contains informative videos about financial issues as well as bankruptcy protection for families who want a fresh start. To keep in touch and read about consumer finance news and stories you can “Like” the firm’s Facebook page and “Follow” Joseph Wrobel. Ltd. on Twitter. If you need immediate legal assistance, please call Joseph Wrobel, Ltd. by calling (312) 781-0996 to talk to an attorney today.

[i] 11 U.S.C. Section 523(a)(15)