Many married couples argue about money – how much, how little, what is owed, who earns, who spends. In fact, three out of four married couples reportedly argue about money. 70% report that money places a major stress on the married relationship. So it’s no shock that marital debt is often a hotly disputed topic in a divorce. Unsurprisingly, the subject of bankruptcy is a relatively common issue in family court. It is important for those contemplating divorce, or in the midst of a divorce, or even those who are already divorced to know the consequences of bankruptcy on their financial situation.
Bankruptcy is a legal process, filed in a federal bankruptcy court which allows individuals or businesses (known in bankruptcy court as debtors) who owe creditors more money than they can to pay to either work out a plan to repay the debt or completely eliminate or “discharge” the debts.
The timing of a bankruptcy filing can have a tremendous impact on a divorcing or divorced couple. A bankruptcy filing during a divorce can delay certain aspects of the divorce process while the courts sort out the impact of the automatic stay on the collection of child support and/or spousal support as well as on the distribution of property and the existence of certain debt.
Divorcing couples considering bankruptcy should discuss the feasibility of a joint bankruptcy filing prior to filing for divorce. If a joint filing is not desirable, couples should be cognizant of the possible impact a future bankruptcy could have on any settlement agreement. [read more…]
Bankruptcy filed after a divorce has been finalized may have three areas of impact. First, collection of any past due support may be halted pending the resolution of the bankruptcy. Second, a yet-unpaid property settlement obligation could potentially be discharged in the bankruptcy. And third, a joint debt assumed by the debtor-party could be discharged as to the debtor but not as to the co-signing ex-spouse who believed he or she was relieved of the necessity to pay the debt by order of the divorce court.
Individuals can file a Chapter 13 bankruptcy, in which the debtor comes up with a plan to repay creditors over time. They can also choose to file Chapter 7 bankruptcy, in which eligible debts are discharged. The decision as to which type of bankruptcy to file should be made after careful examination of the situation, assets and debts and after speaking with an experienced bankruptcy lawyer.
In order to file for bankruptcy, a debtor must tell the court in detail about all of his or her assets and debts. Depending on the type of bankruptcy chosen, the debtor may be forced to liquidate any remaining assets in order to pay debts.
Debtors are allowed to exempt certain property from the bankruptcy court. Exempt property is generally defined by state law but it usually includes personal jewelry, vehicles up to a certain value, equity in a home up to a certain value and tools necessary to allow the debtor to continue to work.
Additionally, 401k and IRA accounts are not considered property of an estate and are not considered assets of the debtor’s estate by the bankruptcy court. Social Security benefits are similarly protected.
As noted above, equity in a home is typically exempt up to a certain amount. That amount, though, varies widely from state to state. Whether a mortgage loan is in foreclosure and what type of bankruptcy being filed will also bear on whether the debtor will be able to keep his or her home after the bankruptcy.
All non-exempt property will be pooled and liquidated in order to pay debtors some percentage of their outstanding debt balance. The remaining debt is then discharged – with certain exceptions such as child support and spousal support, which are never dischargeable in bankruptcy.