Divorce and Personal Bankruptcy

BANKRUPTCY AND DIVORCE: 

Which comes first?

Published on June 12, 2012 by: Ian M. Falcone

Bankruptcy and divorce cases are often intermingled.  Whether it is the divorce process that leads to the bankruptcy or the bankruptcy filing that leads to divorce is irrelevant.  The fact remains, that we are contacted on a regular basis to address “Which comes first, the divorce or the bankruptcy case?”  The short answer, as almost always is the answer, is, it depends.

There are times when, after full disclosure and waiver of potential conflicts of interest, it makes sense for the parties to file Chapter 7 together before the divorce is completed (a joint Chapter 13 case which obligates the parties to make payments over a 3 or 5-year period is not practical if the parties plan to divorce).  These are typically the cases where the debt is preventing the divorce (i.e. neither party can afford to pay the debts but if they could both walk away from their obligations, the divorce could be fairly easily resolved).  In these cases, the parties and the attorneys must be sure that no conflict exists.  The bankruptcy attorney cannot address what is best for either individual.  In fact, if these concerns arise, the individuals need to seek independent counsel. 

Chapter 7 (liquidation) debtors are “means test” limited by income and family size (these limitations are adjusted by state and county).  If the parties are married, or sometimes just living together, their combined incomes may be used in the eligibility calculations.  This can prevent a married couple from qualifying for chapter 7.

However, after the divorce, certain obligations incurred during the divorce can be helpful.  Assume that the husband is obligated, after the divorce case is completed, to pay child support and alimony.  These obligations are legitimate deductions from income when examining Chapter 7 eligibility under the means test.  Thus, oddly, an individual with a higher income that would not qualify for Chapter 7 bankruptcy when he was married, could become eligible for Chapter 7 after the divorce because of his child support and alimony obligations.  Incurring these debts solely for the purpose of passing the means test is improper.  However, if these debts are likely to be incurred and are helpful in the long run, an individual might benefit from agreeing to these obligations.

Another issue that often arises in our office is the “joint debt” problem.  Let’s assume that the husband and wife are jointly indebted on the mortgage.  In the divorce decree, the Court could determine that the Husband is responsible for the mortgage payments.  While the Husband could file bankruptcy and eliminate his obligation to the bank, he would still be obligated to his ex-wife for the same debt (divorce related debts are no longer dischargeable in Chapter 7 cases).  Let me say that another way, if there is joint debt and you are obligated to pay it in the divorce decree, filing a bankruptcy case may not get rid of the debt.  Anytime there is joint debt, the situation becomes more complicated and an experienced bankruptcy attorney, familiar with divorce issues, should be consulted.

Finally, the filing of a bankruptcy petition creates an automatic stay.  Although the stay does not prevent the parties from obtaining a divorce, it does prevent the division of assets.  Thus, as a practical matter, the bankruptcy stops the divorce and it may be necessary to obtain an order from the bankruptcy court before continuing with the divorce.

Divorce and personal bankruptcy can each be complicated, however the combination is almost certain to create a very complex matter. Because every situation is unique, the only way to accurately determine your options, opportunities and risks is to consult with an attorney who is experienced in complicated divorce and bankruptcy cases. The legal team at the Falcone Law Firm has extensive experience in divorce, bankruptcy and small business law. If you need answers, call 770-426-9359 to arrange for a consultation with an attorney.