I have many potential clients coming in asking about discharging debt in Bankruptcy and wanting to know if it's better to file Bankruptcy before or after the divorce. While I do not practice in the area of Bankruptcy, I will share what I have learned over the last few years from those attorneys with whom I work to practice in this field of law. I can reassure you, that over the past 3 years as the economy has headed downward, the rate of filing for Bankruptcy has headed skyward!
If you, as a prospective client, think you're headed for divorce and have a lot of debt between you and your spouse, it might make sense to file for bankruptcy before starting the divorce process. Filing bankruptcy first can simplify the divorce by clearing out some of your debt. This makes the Equitable Distribution aspect of the divorce much easier and quicker. It is fairly easy to negotiate how the remaining debts should be divided, and protect you from your soon-to-be-ex's bankruptcy filing down the road.
One important thing you might want to consider is filing a joint bankruptcy before the divorce. Not only will this make the final division of any remaining debts even easier, but filing a joint bankruptcy is cheaper than filing two separate ones. In either event, bankruptcies and divorces have serious impacts on each other, especially with respect to your property and personal finances.
How Will The Bankruptcy Effect My Divorce?
When one or both spouses file bankruptcy, all the property, that is, property that was bought or acquired during the course of the marriage, becomes a part of the bankruptcy estate and is available to pay debts. The bankruptcy estate is simply all of your property that you and your spouse own at the time the bankruptcy is filed.
When you or your spouse file a bankruptcy, an "automatic stay" is immediately entered by the court and prevents creditors from collecting on most debts. But the automatic stay doesn't prevent you from asking a Domestic Relations Court to order your spouse to pay child support or alimony.
Once a bankruptcy court decides property is "exempt," that is, it is not part of the bankruptcy estate and so it is not available to be sold to pay debts, but a divorce court can then divide that property. Property exemptions are defined not only by federal law (the "Bankruptcy Code"), but also by the laws of the state in which the bankruptcy is filed.
How Is My Marital Settlement Agreement Effected by Bankruptcy?
Negotiating a marital settlement in the midst of bankruptcy is complicated. Debts related to a marital settlement are presumed to be "non-dischargeable" in bankruptcy, meaning that the person who files bankruptcy can't have those debts wiped out and must still be responsible for them.
So if you think your soon-to-be-spouse is contemplating bankruptcy after your divorce is final, you'll want to word your Marital Settlement Agreement in such a way that your soon-to-be-ex's obligation looks and acts as much as possible like a support obligation instead of a "property settlement." That is so simply because support obligations are more difficult to have discharged.
For many bankruptcies filed on or after October 17, 2005 (when the Bankruptcy Laws were significantly changed), any obligation between former spouses can't be discharged in bankruptcy. So, a spouse with an alimony and/or child support obligation can't have that obligation discharged in bankruptcy if the bankruptcy petition was filed on or after October 17, 2005.
Can An Indemnity Clause Help If My Ex-Spouse Tries To Discharge the Debt?
Many lawyer who practice in the area of divorce lawyer are adding yet another layer of protection for their clients by adding an "Indemnification Clause," based on the possibility that the former spouse may file for bankruptcy after the divorce. This "hold harmless" or "indemnity" clause written into the divorce agreements, require your spouse to pay certain debts or repay you if a creditor makes you pay the debt. While this indemnity clause doesn't provide total protect, it does make it less likely to get that particular debt discharged by the bankruptcy court. At that point, you can go to bankruptcy court and ask the judge to enforce the indemnity agreement. While an indemnity agreement won't guarantee you'll get paid, it's one more factor for the bankruptcy judge to consider.
Contact An Attorney
Going through a divorce and bankruptcy at the same time is confusing and complicated. If you find yourself in this position it is best to consult with a lawyer as soon as possible. To talk to us about your case, please visit our website or call the office to schedule your initial consultation. We employ a client based approach, which means that we are selective in the cases we take so that we can be available to our clients. We spend time with you to thoroughly understand the facts of your case, so that we can provide you with a comprehensive and realistic legal evaluation. Our process begins with a half-hour low-cost consultation, all of which is credited back to your account if we accept your case.
