The divorce process can often be emotionally (and financially) draining. At the end of the long road, you have a settlement agreement and/or a divorce decree by which you are prepared to abide. And then your ex-spouse decides to file for bankruptcy protection.
What now? The bankruptcy process as an ex-spouse and creditor can be similarly emotional and financially difficult. The basic information about post-divorce obligations and bankruptcy though can do much to set your mind at ease.
When your ex-spouse files for bankruptcy, all efforts to collect any debts must stop pursuant to the court’s automatic stay. All creditors must cease collection activity pending the resolution of the bankruptcy case unless they fit into an exception or are granted special permission by the court. A court proceeding to establish or modify a support award need not stop under the stay order, according to federal law.
In a Chapter 7 filing, support can still be collected from post-bankrupcty-filing income of the debtor as those funds are not considered part of the bankruptcy estate. In a Chapter 13 filing, in which the debtor restructures debt and establishes a payment plan, post-filing income is still considered part of the bankruptcy estate and cannot be touched.
Further, under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (bankruptcy reform legislation), unpaid child support and alimony is given priority over any other debt, including taxes owed. A spouse who is owed back support must file a “proof of claim” like every other creditor in order to receive payment.
(The spouse receiving support will receive written notice of the bankruptcy filing as will the state support enforcement agency. If you are NOT provided with official notice but hear about the bankruptcy filing, don’t ignore it. Consult an attorney immediately to protect your rights.)
Under the old bankruptcy law, property settlement obligations and obligations to pay for debts in a divorce decree were generally dischargeable in bankruptcy. There was a statutory balancing test applicable when deciding if such an obligation should not be discharged. In the reformed bankruptcy code, however, this language was drastically changed.
Now, any obligation to a spouse, former spouse or child incurred in the course of a divorce or separation, by settlement agreement or divorce decree, is NOT dischargeable. This applies to property settlement obligations in which one spouse is required to pay the other some sort of equalization payment. It also applies to obligations to pay debt as ordered in a divorce decree. It doesn’t prohibit the debtor from obtaining a discharge of the debt from the creditor, but prohibits the debtor spouse from discharging any indemnification or hold harmless provision provided in the divorce decree or settlement agreement.
Although the new bankruptcy laws will keep your entitlement from being discharged, you may still need to return to family court after your ex-spouse’s bankruptcy.
If the filing spouse was obligated to pay a joint debt which was then discharged in bankruptcy, the non-filing spouse may still be on the hook for the debt as far as the creditor is concerned. If that is the case, you may need to return to the divorce judge to enforce an indemnification or hold harmless provision in the divorce decree. A motion to modify can be filed, asking for establishment or increase of spousal support to cover the additional debt amount you may now be obligated to pay to the creditor.
On the flip side, if you are the support-paying spouse who has proceeded through bankruptcy, you may choose to present your current financial situation to the court and seek a downward modification of support. Arrearages can add up quickly so don’t delay this request if you are having legitimate trouble paying your support obligations.
Just as in the original divorce process, the post-divorce bankruptcy process is wrought with emotion and complicated legal requirements. As always, it is best to consult an attorney to help steer you through.