Bankruptcy and Family Law: An Overview
By Greenville Family Law Attorney Rustin Duncan, Associate at King Law Offices, Greenville, South Carolina
The current financial downturn has led to financial stress for millions of married couples in our country. Many have turned to bankruptcy as a way out of debt and to attempt to get a fresh start.
Sadly, however, this financial stress has also contributed to the breakdown of marriages and has left many couples facing divorce. While it may seem the two legal issues are independent of each other, the implications of each can have serious legal consequences on the other.
If the debt a couple has incurred is substantial, it may make sense to jointly enter into and complete a bankruptcy before finalizing the divorce. The advantage of discharging debts before the divorce is final can simplify the division and distribution of the marital property and debts. It can also avoid possible future liability of debts assigned to your spouse in the event of his or her bankruptcy. Sometimes, however, one spouse will file for bankruptcy after the divorce proceedings are under way. This can have serious implications on the divorce process.
Once a petition for bankruptcy is filed, an automatic stay becomes effective and a bankruptcy estate is also created. The estate includes all property of the person filing for bankruptcy–the “Debtor.” With a bankruptcy pending the court can still move forward to determine custody, child support, and spousal support but any property division decision must wait until the bankruptcy proceedings have concluded or the automatic stay has been properly lifted as to marital assets.
While there are several different types of bankruptcy, usually the only two that come into play in a divorce situation is Chapter 7 bankruptcy and Chapter 13 bankruptcy.
Under Chapter 7 bankruptcy a total discharge of debts is obtained. Under Chapter 13 bankruptcy, a repayment plan is structured by the court allowing the debtor to make payments over time in order for the debtor to be able to keep certain assets and then have remaining debts discharged. The type of bankruptcy affects which debts can be discharged, if and when debts will be discharged, and the contents of the bankruptcy estate. Property settlements between spouses in a divorce action are not dischargeable under Chapter 7 but can be dischargeable if certain conditions are met under Chapter 13. This means that a spouse or ex-spouse filing for bankruptcy could be released from their obligation to pay debt distributed to them by the court in the divorce proceeding. Further, the spouse or ex-spouse can potentially avoid having to make payments to the other spouse if those payments were ordered as part of the property settlement. The spouse not seeking the bankruptcy may become liable for debts that were distributed to the other spouse in the divorce.
Bankruptcy, however, does not discharge a debtor from their child support or alimony obligation. On the contrary, these obligations get priority treatment under the bankruptcy law. This means that under Chapter 7 the first debts to get paid are the child support and alimony obligations of the debtor. Under Chapter 13, any support obligations must be paid in full during the bankruptcy repayment plan. The failure to pay current support obligations in full can result in denial of a discharge under Chapter 13.
Bankruptcy and divorce have serious legal consequences. The issues mentioned in this article highlight the major issues that can arise when bankruptcy and divorce intersect. There are other issues that can arise. You should seek the advice of a competent divorce attorney and a competent bankruptcy attorney when facing these issues.
Thanks to Rusty Duncan for this post. It contains a great overview of the intersection of bankruptcy law and family law. You should know, however, that some of these concepts are extremely complicated. For example, the difference between a debt “in the nature of support” from a property settlement or “hold harmless debt” is very clear in family court and often not clear at all in bankruptcy court. Keep in mind that this is a great post, but only a general overview. –Russell A. DeMott