FILING FOR BANKRUPTCY WHEN DIVORCING REQUIRES CAREFUL NAVIGATION. Bankruptcy Attorney Carrie Boyle and Family Law Attorney Anthony Valenti of Boyle & Valenti Law, P.C., offer their top 5 considerations:
1. Consider filing for bankruptcy together before the divorce
Debt plays a major role in the financial outcome in a divorce when taking into consideration the overarching resolution of other financial issues such as equitable distribution. Married couples may file a “joint petition” pursuant to which both parties are filing for bankruptcy and seeking to discharge in a single bankruptcy action the debts of both parties that are dischargeable in bankruptcy. If debt is minimized or wiped out completely in a bankruptcy prior to a divorce, it may provide for a more balanced outcome for both parties. In a somewhat amicable divorce it may be beneficial for the parties to agree to file a joint petition and complete their bankruptcy prior to filing for divorce. There are significant benefits to filing jointly such as it costs less and it generally permits higher exemption values for the assets that are subject to liquidation by a bankruptcy trustee.
2. File separate bankruptcies if a couple makes too much money
In some cases, if a married couple makes too much money to file a Chapter 7, which is the more expedited chapter that wipes out the credit card debt and other types of unsecured debt, each of the still married individuals may independently qualify to file for Chapter 7. If a couple finds themselves in the situation where collectively they make too much money to file for Chapter 7, they should talk with a bankruptcy professional about exploring the option to each file independent Chapter 7 cases.
3. Be aware and consider which debts are dischargeable and which are not
The bankruptcy code provides for certain types of debts that are “exceptions from discharge” and remain liabilities of the party filing for bankruptcy, notwithstanding the bankruptcy. One of these exceptions includes any debt that is for a domestic support obligation for the care and support of dependents of the debtor in bankruptcy. This exception to discharge is applicable in any chapter of bankruptcy. But in a Chapter 13 bankruptcy, divorce mandated equitable distribution may be discharged in some cases. Notwithstanding the categorization of the obligation to pay a former spouse “equitable distribution,” what will and will not be deemed equitable distribution as a disguised support obligation can sometimes be a complicated issue. In pursuing a divorce decree and/or drafting a marital settlement agreement, the parties must be aware of these issues, and be careful in the determinations they seek and/or wording and provisions they utilize in any marital settlement agreement.
4. Bankruptcy can impact a couple’s responsibility for debts
Couples will often set forth in a settlement agreement that one of the parties is responsible for a particular debt or otherwise seek such a provision as part of the divorce. While the marital settlement agreement or divorce decree is binding upon the divorcing couple, it is not binding upon the third parties to whom the debts are owed. For example, if there is joint debt that the marital settlement agreement or divorce decree directs one party to pay, that does not prevent the creditor from pursing either or both the parties. If a debt that the party responsible under the marital settlement agreement or divorce decree is ultimately discharged in bankruptcy, the third-party creditor can still pursue the other party, leaving that party to have to pursue the responsible spouse for the same.
5. Bankruptcy can delay and complicate divorce
A bankruptcy filing results in an automatic stay of all pending actions requiring the filing of a motion in bankruptcy court to proceed with a divorce. At a minimum, it delays any sale or liquidation of assets while the divorce and bankruptcy cases are pending. The divorce court and the couple need to consider the impact of the bankruptcy on their respective rights for the distribution of assets and liabilities. Thus, where the filing of a bankruptcy is likely, it is important to consider these potential issues and strategize the timing of the divorce filing.
Boyle & Valenti Law, P.C.
10 Grove St. | Second Floor | Haddonfield
(856) 499-3335 | B-VLaw.com
Published (and copyrighted) in Suburban Family Magazine, Volume 10, Issue 4 (June 2019).
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