I’m getting divorced. Will bankruptcy help?

As an Asheville Bankruptcy lawyer I often talk with people who are going through a divorce. Not surprisingly, many people who are experiencing divorce face daunting financial challenges. In fact, it is common for money matters to be at the root of the issues that result in divorce in the first place.

I understand that the combination of divorce and financial crisis can create extreme stress. Unfortunately, this combination can also be legally treacherous. For this reason, we take care to explore all possible avenues, identify risks, and work with you and your divorce attorney to arrive at the best possible solution for your difficult situation. We also take care to listen and understand your concerns.

In this post I will try to address some common issues that you may find at the intersection of family law and bankruptcy law. In addition to my post, I also recommend that you read a post on the same subject by attorney Kevin Radey. Kevin has a great perspective on this subject and his blog posts on bankruptcy in general are top notch. Kevin’s blog post on Bankruptcy and Divorce can be found here: http://www.wncdebtlaw.com/2012/09/02/getting-married-or-divorced-bankruptcy-can-deliver-the-fresh-start-you-need/. You can find Kevin’s website here: http://www.wncdebtlaw.com/.

One of the first divorce related questions that I’m asked- both by other attorneys and by clients- is whether people should file bankruptcy before or after they get a divorce. There is no simple answer to this question and each case is different. Generally speaking, if both parties are in agreement about bankruptcy, they don’t have significant assets, and they have lots of debt, then filing bankruptcy before a divorce can be beneficial. In particular, filing chapter 7 bankruptcy can help. Here’s some information on ch7: https://kightlaw.com/bankruptcy/chapter-7/. A married couple, including a separated couple, can file a joint bankruptcy petition. In other words, they can file together. This means that they save money on attorney fees and court costs. Additionally, most couples share finances. Filing a joint bankruptcy petition can help by reducing duplication of bankruptcy schedules, financial records, and information. Finally, if debt is the primary obstacle a divorcing couple faces, filing ch7 bankruptcy can help them remove the obstacle, provide a fresh start, and help focus their attention and energy on other issues. I’ve occasionally had couples come to me to file bankruptcy while in the midst of a divorce only to reunite due the stress relief that a bankruptcy discharge can provide.

Sometimes, things are more complicated. First of all, even if both of the divorcing parties agree about things, a bankruptcy Trustee may not. A common problem arises from what is what is known as equitable distribution (or “ED” for short). ED simply refers to the distribution of marital assets and debts. In ch7 bankruptcy, a Trustee has a duty to sell all non-exempt (ie, unprotected) assets owned by the debtors. Due to certain quirks in the law, a couple may be able to protect assets as a married couple that they wouldn’t be able to protect if the assets were owned by either person individually. Since a bankruptcy Trustee can liquidate assets that a debtor receives as part of a divorce within 6 months after filing, divorcing parties need to take special care not to create a situation in which an otherwise exempt asset becomes non-exempt and liquidated due to an ED agreement they thought was bulletproof. We can help.

Divorcing parties can file ch7 together; however, they may not file ch13 bankruptcy together. The reason is that ch13 lasts for 3-5 years. During that time period there is the potential for a conflict of interest to arise, including problems arising out of ED claims, a subject which I will address below.

Additionally, problems can arise if the parties are not agreeable. Before I address issues involving disputes between divorcing parties, I need to say that alimony and child support are not dischargeable in bankruptcy. No matter what chapter you you file, a debt to a spouse or former spouse for alimony and/or child support will not be extinguished in bankruptcy. Things are a bit different when it comes to ED.

ED debts are not dischargeable in ch7 or ch11. They are, however, dischargeable in ch13. Here’s some information about chapter 13 bankruptcy: https://kightlaw.com/bankruptcy/chapter-13-debt-reorganization/. For this reason, if a party cannot repay an ED debt, the only bankruptcy chapter that will help is ch13, which involves a repayment plan. There are significant issues to consider when facing this difficult situation.

Sometimes, one person wants to file bankruptcy and the other does not. If both parties to the marriage are liable on a debt, then the one filing bankruptcy will receive a discharge of the debt. The creditor can (and usually will) proceed to collect against the person who didn’t file for bankruptcy protection.

Similarly, if you are owed alimony or support by a former spouse who files bankruptcy, you should consult an attorney. If the bankruptcy Trustee liquidates your former spouse’s assets in ch7 or if your former spouse files a ch11 or ch13 repayment plan then you have priority over other creditors and are entitled to be paid before almost everyone else. But, in order to be paid you must timely file a proof of claim, a document that shows the Court and the Trustee proof that you are entitled to receive money from your ex. We can help you file a proof of claim and protect your rights.

Finally, there are situations when it makes the most sense to file bankruptcy after a divorce is final. Divorce can sometimes be complicated and it often makes sense for the parties simply to resolve the issues between them and then clean up their debt problems afterwards.

As a WNC bankruptcy specialist, I help people come up with a strategy to meet their needs. My desire is for people to emerge from divorce and bankruptcy with a fresh start. Given the diverse and often complicated scenarios that a divorce can create for people facing debt issues, we work hard at Kight Law Office to identify the important legal issues, provide care and nonjudgmental understanding, and work with our clients towards a successful resolution of their debt problems.

Contact us to schedule a comprehensive consultation so that you can best understand your rights: https://kightlaw.com/contact/.