Should You File for Bankruptcy During Divorce?
It is no secret that financial problems are among the most common causes of divorce. Financial distress can drive a big wedge between spouses. Filing for bankruptcy can be the cause of a divorce or it can be the result of a divorce when financial burdens dictate that debt relief is a necessary part of the divorce process. In almost every case, the cost of maintaining two separate households is greater than living together and there may not be enough cash for both to pay off debts and start anew. Money can be in such short supply that people must decide between paying bills and putting food on the table. In those instances, a bankruptcy may be unavoidable.
Many divorcing couples who are experiencing financial distress file for joint bankruptcy to avoid having to file separately after the divorce. Only married couples can file a joint bankruptcy and in doing so, avoid paying for attorneys and other associated costs, twice. If the divorcing spouses are on speaking terms and willing to negotiate, a joint bankruptcy can often result in a positive outcome for everyone involved. Another fact many people facing a divorce are unaware of is that it is possible to file for bankruptcy as an individual while you are still married. Married persons living apart might want to file for bankruptcy individually if most of the debts are in one spouse’s name only. It is also possible to file bankruptcy while the spouses are still living together if it can be shown there are separate incomes and debts within the marriage.
Many of the misconceptions surrounding bankruptcy and divorce today arise from changes made to the Bankruptcy Code in 2005. Prior to 2005 it was possible to get out from under the obligation to pay joint debts incurred during a marriage by performing a Chapter 7 Bankruptcy. Today, that option in no longer on the table and a person can be sued by their ex-spouse or held in contempt of court for failure to pay those joint debts. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 mandates that unpaid child support and alimony has priority over any other creditor, including taxes.
The new bankruptcy laws make non-support awards from a divorce non-dischargeable if release of the obligation would hurt the person to whom the obligation is owed more than it would harm the person who owes it. It is also not possible to discharge court-ordered child support or spousal support obligations. A Chapter 13 Bankruptcy will allow consolidation of debts, but it does not discharge them and payments must still be made. Chapter 13 Bankruptcy will allow debts arising from property settlements to be discharged, but not those debts arising from support obligations. It is possible to reduce the chance of a debt being discharged by a bankruptcy court if that debt is specified as spousal support or alimony within the divorce agreement.
If a bankruptcy court discharges property settlement debts owed to you by your spouse it is possible to get the court to order an increase in support or alimony payment levels based on those new liabilities. The financial reality of one spouse paying off additional debts can justify a request for modified support orders. Likewise, the spouse paying alimony or support can also ask for a reduction in payments to fit reduced financial circumstances. If debt is likely to play a big part in your divorce, it may be worthwhile to consult a bankruptcy attorney to see what your options are.