If a bankruptcy is filed while a divorce is pending, the divorce will be stayed subject to any resolution granted by the bankruptcy court. Federal laws take precedence over states' family laws. Divorce courts usually will not proceed if they know a bankruptcy has been filed because court decisions regarding marital property could subsequently be reversed.
Automatic Stay
When a person files for bankruptcy, generally all creditors are prohibited from attempting to collect a debt from that person unless they fit within certain exceptions. Even if the creditors continue to pursue for collection through court, any decision regarding debt property will be reversed. This automatic stay also applies to divorce proceedings. However, under the statutory bankruptcy exceptions, divorce actions are allowed to proceed when they involve establishing paternity or when they involve alimony, maintenance or support. Outside these specific instances, the automatic stay remains in effect.
Even if for some reason, a divorce court allows a division of property, any agreement has to be approved by the bankruptcy court. If the court does not approve the division, the agreement is considered a violation and will be overturned. Any settlement is void.
A family court may proceed on issues of paternity and alimony, but may require an order from the bankruptcy court that specifically finds that motions on paternity and support are excepted from the bankruptcy stay.
Length of Delay
If one party files for bankruptcy while a divorce is pending, the non-filing party should expect a delay of at least 90 days. This delay stops any scheduled proceedings including trials and hearings. During this time, the bankruptcy judge must decide about the debt property and may even assign a third-party trustee to handle the property. The goal of bankruptcy is to satisfy outstanding debt and a hierarchy of creditors is established. The non-filing spouse is considered another creditor. Marital property, including any real property, is subject to the federal bankruptcy laws.
How to Resolve the Conflict
The best-case scenario is where both spouses file for bankruptcy together. Both spouses can then settle family debt. Additionally, certain dischargeable debts can be eliminated more expeditiously and taxes can be paid without interest or can be discharged entirely. When family debt is settled, a divorce can proceed more quickly and without animosity.
If, however, the bankruptcy is filed by one spouse, that spouse should provide notice to the non-filing spouse and all attorneys involved. This disclosure will save time and costs for unnecessary actions that may be eventually overturned by the bankruptcy court.
Working with both a bankruptcy and divorce attorney together may also avoid a lot of pitfalls.
After the Bankruptcy
Subsequent to a ruling by bankruptcy court, if the filing spouse has been granted a discharge of debt, a family court cannot then assign marital debt against that spouse. Additionally, the family court cannot divide the debtor's property as long as that property is part of his or her non-exempt estate. However, the family court can divide any property exempt from the debt estate.
Find an Attorney
A simultaneous bankruptcy and divorce can become legally complicated as well as emotionally stressful. The best course of action is to work with both a divorce attorney and a bankruptcy attorney to determine how to avoid confusion. If possible, try to file with your spouse. Whatever, the circumstances, find an attorney who is experienced with the federal bankruptcy laws and how they may conflict with your state's family laws.
