What happens when filing for divorce and bankruptcy?
Bankruptcy and Divorce are two of the more traumatic events one can go through and unfortunately, they often go together. Divorce can put financial strain on the best of situations and financial strain can make couple more likely to divorce. The interplay between these two areas of law is extremely important.
There are several really important things to consider when the issues of bankruptcy and divorce collide; non-dischargeable support obligations, discharge of community debt and different effects between the Chapter 7 and Chapter 13.
Bankruptcy as a tool for both parties:
When one spouse files for bankruptcy, the property of the bankruptcy estate includes that spouse’s sole property, sole debts and also the spouse’s community property and community debts! This means that one spouse filing for divorce, in many cases, creates huge benefits for the non-filing (bankruptcy) spouse. For this reason, it often makes sense to file for bankruptcy PRIOR to the divorce. If you wait until after your divorce to file bankruptcy, the community debts become sole debts and that means that one spouse cannot wipe out the community debt with a single filing.
Non dischargeable Support Obligations:
Support obligations include child support and spousal maintenance or alimony. Like student loans, these obligations cannot be discharged in bankruptcy- ever. Property settlement agreements or property division ordered pursuant to a divorce MAY be considered support obligations too. This is where things get interesting… under the Chapter 7, property equalization payments and indemnification are also non-dischargeable under the 13, this is not the case…
Bankruptcy as a dangerous weapon:
Under the Chapter 13 bankruptcy, a property settlement agreement is treated like any other unsecured debt, and is dischargeable. This means a spouse contemplating bankruptcy has the ability to structure an agreement where s/he takes a large proportion of the debt and/or exempt assets (like retirement or home equity) in return for the payment from say a business. Under this scenario the shrewd spouse may enter into an agreement, file for a Chapter 13 bankruptcy and avoid paying under the property settlement agreement. This could result in an extremely inequitable distribution of the marital estate. Your attorney can help prevent this from happening to you with proper and careful planning.
The interplay between divorce and bankruptcy is complex and significant. If you are considering either or both, take advantage of the free consultations that we, and many other attorneys offer.
Phoenix Family Law Attorney Billie Tarascio practices primarily out of the Mesa Modern Law Office. She has been a family law attorney for eight years and is the owner and founder of Modern Law. Call today 480-649-2905.