What Happens If I File Bankruptcy During Or After A Divorce?

There is an old adage in bankruptcy, “divorce your debts before you divorce each other”. The reasoning behind this is that jointly held debt is often a point of contention in bankruptcy proceedings, particularly as to who will be responsible for the debts after the divorce. If appropriate, a jointly filed bankruptcy will eliminate the majority of these debts prior to the divorce and take that argument off the table in the divorce proceedings.

If that does not occur, however, a bankruptcy filing will certainly not inhibit a divorce proceeding, but it may raise some issues. In Chapter 7, once you file for bankruptcy all your property legally becomes part of the bankruptcy estate. As such, it may inhibit an effective property settlement with the estranged spouse until the bankruptcy trustee has completed their administration of the estate. In the case of an individual bankruptcy filing, there may also be disputes in the divorce over who is responsible for joint debts, even though personal liability for the spouse who filed for bankruptcy will be discharged.

Divorce during an active Chapter 13 case generates many more issues. First, both spouses’ income and expenses were included in the budget when the bankruptcy case was filed. Assuming that the spouses separate, then the Chapter 13 budget and repayment plan will likely have to be modified significantly. If Chapter 13 was filed jointly, then a decision has to be made as to how to proceed. The case can continue as a joint case, with the budget and plan being modified for the changes with the now separate households. The Chapter 13 can also be severed, meaning that the case is split into two separate cases. At least one of the spouses will likely want to retain new counsel in this situation, as there can easily be conflicts involved with who is to receive which assets and who is responsible for which debts. If severed effectively, however, each spouse will now have their own Chapter 13 case that they are responsible for. Sometimes it may simply make sense to dismiss one of the spouses from the case. If the assets being protected are assigned to only one spouse, and they also hold the majority of the debt individually, the other spouse may elect to simply no longer be part of the bankruptcy case.

Divorce during a pending bankruptcy case can be complicated and have significant impacts on both spouses, so each having independent legal advice is highly recommended.

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