Bankruptcy and Divorce: Really Oil and Water?

How Does Bankruptcy Affect my Divorce? 

It depends on when and who is filing.

Divorce is hard enough with the fights over everything such as who gets the house to who takes the vacuum that was a wedding gift.  However, hot emotions in a divorce may cause people to forget to pay bills, require a second rent and utilities for the spouse that moved out, and oppressive support orders for the breadwinner.  Add in the cost of divorce attorneys (which can be as much as $350 per hour) and a divorcee may find his entire savings account drained in a short time.  After a messy divorce, many couples only have debt to show for a once thriving marriage.

Bankruptcy is an option before, during, and after the divorce.  But the divorce laws of California do not mix well with bankruptcy laws of the United States.  This is a three part article meant to give a general overview of how the two laws interact.

During the Bankruptcy

First off, in a battle between Family Law and Bankruptcy Court, Bankruptcy Court always wins.  Bankruptcy Court is a Federal Court which means it follows the laws of the United States.  Family Law is limited to state laws, such as California Family Code, and must take second seat to Federal laws.  In fact, a Federal Court order on property may overrule a State Court order on property.  

That means a Bankruptcy will stop an ongoing divorce.  Specifically, the Bankruptcy Court will have to approve any division of property.  In fact, if not approved by a Bankruptcy Judge, the division of property is considered a violation and will be overruled.  Can you imagine paying your divorce attorney $2,500 (about 10 hours of work) to negotiate and draft a settlement over the house, savings, and cars only to find out the agreement is not enforceable because one of you filed bankruptcy? 

How to Avoid the Problem

The key for an ongoing divorce that is going to file for Bankruptcy is disclosure and lots of it.  Let your ex-spouse (as well as your attorney) know that you are going to file.  In writing.  By letting your ex (or your attorney) know in advance, that will prevent any wasted time working on issues that cannot be solved without Court approval.  Or, at the very least, your divorce attorney can submit any agreements to the Bankruptcy Judge for approval. 

The disclosure requirement applies to the State Court as well.  By giving proper written notice to the Family Court, almost all hearings will be delayed because the State Judge is not allowed to make any rulings on property. Do not run the risk of angering your divorce Judge by hiding your Bankruptcy.  By the way, a State Judge cannot forbid you from filing bankruptcy, it is your right to do so under Federal Law. So disclose to everybody, including the judge.

My Ex Filed Bankruptcy. Does this Hurt Me?

If you ex-spouse filed for bankruptcy before the divorce finishes, then expect at least a 90 day delay for your divorce.  That means court hearings, including trials, may be delayed.  In California, support obligations remain as is, property is still restrained from unusual transactions, and any pending sales of real estate are put on hold.  Since the US Trustee is now involved, you will see a third party suddenly taking an interest in your finances.  The US Trustee may freeze accounts. The IRS will want any late tax returns filed, or you may need a bankruptcy attorney to represent your interests.

Even worse, the US Trustee may decide it wants to sell the community assets, like a house, to gain equity quickly.  Be forewarned, the US Trustee wants a quick sale so expect the house to be priced below market. 

Finally, the bankruptcy may force certain creditors to call in their debt.  For example, if you were a joint owner on a car, the lender may repossess the car during the bankruptcy which will ding your credit even though you ex-spouse was driving the car.

How Will Bankruptcy Help Me?

Bankruptcy by itself has many protections.  For example, creditors cannot call you, garnish your wages, sue you, or repossess anything without the Bankruptcy’s approval.  This includes your ex-spouse as a collector.  For example, if your ex-spouse is trying to get the house from you, the bankruptcy will delay it. 

The Bankruptcy can also be used as a sword for your divorce.  For example, if your ex-spouse is dragging her feet to sell the house or has not been paying the bills then the Bankruptcy can help.  The Bankruptcy puts the US Trustee in charge of your assets.  That means, the Trustee can force the sale of the house by Court order and they will sell a price meant to move it.  The Bankruptcy will also eliminate your unsecured debts thus absolving you from debts like credit cards or utility bills.  This will make your divorce go a lot smoother.

Finally, if you are behind in support, it may be possible to come up with a repayment plan for the arrearages.

Contact Me | Next Page: Who's Debt is It?