How Bankruptcy Impacts Divorce Cases

Filing for bankruptcy allows people to get control of their financial obligations so they don’t have to spend the rest of their lives indebted to their creditors. Bankruptcy proceedings have far-reach implications that can provide someone with relief for various kinds of debts. Because much of the issues that arise in a divorce case concern the parties’ financial rights and obligations, bankruptcy is an important consideration when filing for divorce and vice versa.

Property Division and the Automatic Stay

Filing for bankruptcy lets people stop creditors in their attempts to collect on the petitioner’s outstanding debts. This is known as an “automatic stay” in bankruptcy. For example, creditors cannot sue you for payments you owe on a loan after you file for bankruptcy. This allows the bankruptcy petitioner to sort out their affairs without their creditors interfering with the process using legal action.

It is not entirely accurate to look at divorce as a single legal proceeding. Divorce is more like different legal proceedings rolled into one. Because marriage is a legal status that is regulated by states, only a state court can legally dissolve a marriage. When a state court legally declares a marriage to be dissolved, that can be seen as one of many legal proceedings for a dissolution of marriage action.

When a marriage is dissolved, all the property the couple acquired must be divided between them since they no longer own such property as a unified entity. The process of dividing marital property can be seen as its own proceeding for determining the parties’ respective rights and obligations to property.

Because property division in a divorce can create financial obligations for the parties, the automatic stay in bankruptcy can pause the property division process pending resolution of a party’s bankruptcy matter. However, other aspects of a divorce—such as child custody determinations—may move forward.

Other aspects of filing for divorce entail legal proceedings for determining domestic support claims. Domestic support claims include spousal support—also known as alimony—and child support. Alimony and child support implicate an obligation to pay money. These issues can also be viewed as involving their own legal proceedings because not all divorces necessarily deal with the same issues—like child support, for example.

However, proceedings regarding domestic support obligations are not halted during the automatic stay period in a bankruptcy case. This is because your former spouse or child’s livelihood might depend on domestic support payments.

For example, child support is a debt that arises from the legal relationship between a parent and their child. This kind of debt is different from obligations that stem from contractual obligations. Therefore, it would be unjust to allow someone to delay payment during the automatic stay period in bankruptcy.

Discharging Debts in Bankruptcy

Bankruptcy provides the petitioner with a significant form of legal relief by discharging certain debts. Whether you filed for a Chapter 7 liquidation or a Chapter 13 reorganization determines what kind of debts are canceled. However, for the most part, things obligations such as credit card debt, utility bills, personal loans, and collections accounts are discharged at the conclusion of bankruptcy proceedings. Importantly, such debts are canceled regardless of whether they were repaid during the bankruptcy process.

However, bankruptcy does not knock out all of your debts. Certain debts are outside of the scope of a bankruptcy discharge. Debts regarding important obligations, such as taxes, certain student loans, and legal damages due to tortious or criminal conduct, are beyond the reach of a bankruptcy discharge. Many of these obligations arise from a legal rather than contractual obligation to pay.

Just as domestic support obligations are immune from the automatic stay in bankruptcy, child support and alimony obligations also cannot be discharged upon conclusion of the bankruptcy process. Again, someone’s ability to buy necessaries of life—such as food and healthcare—may depend on child or spousal support payments. Therefore, domestic support obligations are not dischargeable in bankruptcy.

Speak to a Legal Professional from Hope Law Firm

As you can see, the divorce process often involves financial issues. To better understand the legal and financial implications of getting a divorce, you discuss your case with an experienced attorney from Hope Law Firm. We are here to guide you through each step of the divorce. It is our job to advise you about the legal impact of different courses of action, so you can make an informed decision about issues that can potentially affect the rest of your life.