Most experts agree that financial difficulties rate highly among the leading causes for divorce. Not surprisingly, when couples are dissolving their marriage they will often seek my advice regarding bankruptcy. I often hear from clients who are referred by a family law attorney. I also sometimes see clients after a family court judge has advised them to seek counsel from a bankruptcy attorney. This article explores a few of the most frequently asked questions involving bankruptcy law as it pertains to marital dissolution.
The first and most common question that arises is whether or not bankruptcy removes an obligation to pay child or spousal support. The answer pure and simple is that bankruptcy does not remove these obligations. Bankruptcy Code Section 523(a)(5) excepts from discharge debts owed to a spouse, former spouse, or child of the debtor if such debt is in the nature of alimony, support, or maintenance and is in connection with a separation agreement, a determination made under state or territorial law by a governmental unit. In fact bankruptcy often helps a party meet their support obligations in freeing up needed resources by removing other burdensome debts.
This brings us to the second most common question. The question is whether or not bankruptcy discharges an obligation to pay property settlement obligations, spousal indemnities to pay common debts, or orders to reimburse for the other spouses attorney’s fees. This is a much more complicated question. First, the answer to the question depends on which chapter of bankruptcy is filed. In a Chapter 7 bankruptcy, 11 U.S.C. § 523(a)(15) excepts from discharge any debt that is to a spouse, former spouse or child of the debtor; that is in connection with a separation agreement, divorce decree, order of a court or record or determination made in accordance with state or territorial law by a governmental unit; and is not a support obligation. In other words, property settlements obligations are not within the gambit of Chapter 7 discharge.
On the other hand, 11 U.S.C. § 523(a)(15) is not applicable to a discharge in a Chapter 13 case under 11 U.S.C. § 1328(a)(2). Even with a Chapter 13 one must be careful to distinguish an obligation to make a non-support related payment from the mere division or partition of community property. A spouse or former spouse fully retains the right to their share from the division of the community property. This is not affected by a bankruptcy discharge.
Another consideration is that it is often the case that if both spouses agree to file bankruptcy, regardless of chapter choice, that an obligation to indemnify for the payment of third party debts is either avoided altogether or becomes moot upon the bankruptcy discharge of both spouses. So if both spouses obtain bankruptcy discharges, many times neither spouse will have to pay for the third party debt. This can amount to a win-win situation for both spouses. As a result it is often prudent for one spouse to offer to pay for the bankruptcy of the other.
The last common question for discussion has to do with the relative timing of bankruptcy relative to their divorce. Specifically, many clients ask whether it is advisable that they wait until the divorce is finalized before filing for bankruptcy. While there is no easy hard and fast answer to this question, several key points should be considered. The first key point has to do with urgency. If one needs to stop a wage garnishment or a pending foreclosure it probably is not advisable to wait. On the other hand waiting for a finalized divorce decree along with an attendant Marital Settlement Agreement (MSA) and order thereon might favorably affect property exemptions, controversy over what is and is not property of the debtor’s bankruptcy estate, and qualifications under the means test. Qualifications under the means test might affect whether the client can file a Chapter 7 bankruptcy or not and what the client is required to pay into a Chapter 13 bankruptcy plan. Each case will be unique and the pros and cons will need to be carefully weighed by an experienced bankruptcy attorney. With bankruptcy the timing of a case is crucial, so an early evaluation is recommended to insure the best outcome in a given case. Also, certain planning opportunities may require timely and close cooperation of the client’s family law and bankruptcy law attorneys.
For advice specific to the facts of your case please contact Attorney Raymond Schimmel at (619) 275-1250 or visit my website at http://endbillcollections.com/