Where there is a divorce, there is often financial duress, which is why divorce and bankruptcy often go hand-in-hand. And the reality of the matter is that even though two people may very well be in a great hurry to get away from one another by ending their marriage, the prudent move before filing a divorce complaint and retaining separate attorneys will almost always be making one last trip together to speak to a single attorney about clearing up all marital debts through a properly filed bankruptcy prior to divorcing.
When we are talking about divorce with our Clients, quite frequently a discussion of bankruptcy will also ensue. This is because, unfortunately, the creation of an additional household makes it difficult if not impossible for many separating spouses to maintain and pay their current debts, let alone the new demands of a new home as well. The truth of the matter is actually that, in many cases, a bankruptcy can help out both spouses if they file jointly prior to filing a complaint for divorce. Common bankruptcy questions we are asked frequently fall into four categories; 1) The payment of child support and alimony after a bankruptcy has been filed; 2) The enforceability of a property settlement agreement after a bankruptcy has been filed; 3) What happens to a joint credit card debt if only one spouse files for bankruptcy?; and 4) What happens if one spouse files for bankruptcy during a divorce proceeding but the other does not?
In most cases, once a debtor files for bankruptcy, all creditors must stop all actions to collect their debts. This is called the “automatic stay.” The automatic stay stops all foreclosures, garnishments, bank levies, and creditors. However, the automatic stay does not apply to the enforcement of the collection of child support or alimony. These types of obligations have a super priority under the Bankruptcy Code. Any child support or alimony garnishment order(s) that deduct current support from a severed spouse’s wages are generally unaffected by the bankruptcy filing. However, in many cases unscrupulous ex-spouses will rack up thousands of dollars in child support arrears, and the collection of child support arrears will, unfortunately, be stayed in a bankruptcy filing. Most importantly, however, the Bankruptcy Court has declared obligations to pay spousal support and attorney fees as non-dischargeable pursuant to 11 U.S.C. 523 (a)(5) of the federal Bankruptcy Act. Additionally, those debts which have been apportioned in a Property Settlement Agreement may very well also be held as non-dischargeable as well.
If only one spouse files for bankruptcy once a divorce complaint has been filed, then the family court can still continue to hear and decide issues relating to establishing support, be it child or spousal. However, with regard to issues of equitable distribution, the family court will require stay relief, a Bankruptcy Court order that permits the divorce case to continue. Basically, the family court will not split up the family home, divide pensions, or apportion any stocks or mutual funds until the Bankruptcy Court gives it permission to do so, because the marital estate, once a bankruptcy petition has been filed, is now the bankruptcy estate and is under the authority of the Trustee once the bankruptcy petition has been filed.
The distribution of credit card debts is a primary issue that arises in the majority of divorce cases. We generally suggest that all credit card debts be paid off from the marital assets before any monies are distributed if it is at all possible, when the issue of a post-divorce bankruptcy filing rears its head. It is generally always advisable to pay off all of the marital debt before the divorce is put through before the court if it can be done. It is always important to emphasize that post-judgment issues arise in virtually every divorce, especially with regard to debt and especially with regard to credit card debt. It is extremely important for a divorcing couple to tie up as many loose ends as possible. This is because if one spouse files for bankruptcy to discharge a credit card debt and the other spouse does not file, then the credit card company will “go after” the spouse who did not file. When you sign up for a credit card, the contract into which you have entered will almost always automatically place one’s spouse in liability country with regard to that card’s debt should you default. The contract requires both parties to be jointly and severally liable. Basically, this means that if one spouse should die or files for bankruptcy, then the other spouse is liable for the entire credit card debt. Credit card companies do not care whether it is fair to collect the credit card debt from you or from your ex-spouse, even though the charges were racked up by your ex-spouse. The credit card company cares about collecting money and nothing else. They will destroy your credit, establish liens against your home, and garnish your wages for years to come to get their money.
Call Jeff for a free consultation to see what you should do!