Bankruptcy and Divorce

Bankruptcy and DivorceOne of the most common reasons couples pursue divorce is because of financial difficulties and disagreements. Sometimes, one spouse’s spending habits can be the cause of marital tension. Other times, the loss of a job can cause financial strain. Whatever the reason for financial issues in a relationship, they can spell trouble for a couple. When couples make the difficult decision to divorce, their finances often take center stage during the divorce process. They will need to disclose all of their assets and debts, and at some point questions about support payments will inevitably arise – especially if children are involved. However, what happens when a couple’s finances are so shaky that they are considering bankruptcy and divorce?

How Does Bankruptcy Affect Divorce?

There is no single answer to the question of how bankruptcy affects divorce. The outcome of bankruptcy in divorce will be different for each person going through it as they are both unique processes. Bankruptcy is handled by federal district courts that make bankruptcy determinations based on the United States Bankruptcy Code. On the other hand, divorce is a state court matter. In other words, states have their own divorce law.

However, federal law overrides state law so issues can arise when bankruptcy proceedings deal with assets or other conditions being dealt with in divorce. There are several provisions in federal bankruptcy law that help guide judges handling bankruptcy matters that are related to a divorce. The type of bankruptcy you choose to file will also impact how that action affects your divorce. Types of bankruptcies include:

  • Chapter 7 Bankruptcy: Individuals or businesses can utilize this type of bankruptcy. During this procedure, some of your property may be sold to help pay down your debts. However, there are federal and state law exemptions that allow you to keep certain types of property. In fact, many people will get to keep much of their property when the procedure is finished. Secured debt is handled in a different manner, so if you have a car that is not paid off yet then you will not outright get to keep your car without continuing to make payments. You can decide to allow the lender to repossess your property, you can work with the lender to determine payment arrangements, or pay off the outstanding debt with money from the sale of other property. If your income is such that you could afford a structured payment plan under Chapter 13, then you will not be allowed to utilize this process.
  • Chapter 13 Bankruptcy: This type of bankruptcy is used by individuals who have income to pay off their debts through an accepted repayment plan. For this procedure, you will need to propose a repayment plan to the court following the court’s guidelines. Secured debt, like a car you are still paying off, is handled slightly differently here, too. If you have secured debt, you will likely be given the option to make up missed payments over a period of time without the threat of repossession.
  • Other Bankruptcy: There are other forms of bankruptcy that are not typically available to most people. One of these is Chapter 11, which is generally used by businesses with large amounts of debt or individuals with substantial nonexempt assets. The other is Chapter 12, which is similar to Chapter 13 except that 80% of the debt you are seeking to discharge through bankruptcy must come from the operation of a family farm or fishery.

As you can see, bankruptcy can have an impact on your assets in divorce. Florida divorce law allows spouses to take with them any assets they brought into the marriage originally with any assets gained during the marriage being split equitably. Equitably does not necessarily mean equally, and it is important to consider the financial repercussions of any potential divorce settlement so that you can avoid financial hardship that could result in bankruptcy. There may also be unanticipated tax consequences related to divorce, and bankruptcy will not usually discharge tax debt.

Will Bankruptcy Eliminate My Support Payments?

Unfortunately, some individuals choose to pursue bankruptcy as a way to get out of paying their former spouses the support they have been ordered to pay by the divorce decree. While bankruptcy can eliminate many kinds of debt, such as medical bills or credit card bills, it will not eliminate child support obligations. It will not reduce the amount of child support you may be behind on, either. Typically, bankruptcy will not eliminate spousal support, either. While there are some exceptions to this, the general rule is that support payments cannot be discharged in bankruptcy. That is one reason why it is essential to go to request a modification of any support obligations you may have whenever your financial circumstances change.

Are There Benefits to Filing for Bankruptcy Before Divorce?

When you and your spouse anticipate a difficult legal battle over who owes what debt, eliminating your debt can eliminate the need to litigate this. Bankruptcy does provide a vehicle by which you and your spouse can file jointly to have joint and individual debts discharged so that such debts are not equitably distributed through the divorce decree. This will help ensure that neither of you is saddled with the other’s debt once a divorce is finalized.

However, you should keep in mind that in some cases a bankruptcy can be complex and delay the divorce process. It is extremely difficult to maintain two separate legal actions at the same time, and generally not advisable. There is also a chance that some part of the divorce process may be delayed until the bankruptcy process has fully played out. Sometimes a spouse believes that bankruptcy will help protect assets form a former spouse, or at least prevent the former spouse from getting assets that might be sold off during bankruptcy. However, bankruptcy will require you to prove that your financial situation merits discharge or restructuring of your debt. It is not an option that should be chosen to “punish” a former spouse.

Legal Assistance

Bankruptcy and divorce are two specialized legal matters that are best undertaken with the aid of an attorney experienced in handling such cases. If you have questions about how the Florida divorce process might affect you or might be affected by other legal proceedings, contact Scott J. Stadler to schedule a consultation.