Bankruptcy & Divorce in an Equitable Distribution State

It's a matter of fact that many times filing for a divorce will be accompanied by filing for bankruptcy on the part of one or both of the marital partners.  The question of how bankruptcy will affect property distribution (and often more importantly, distribution of marital debt) is something that varies from state to state.  Some states have "equitable distribution" laws, while others have what are called "community property" laws, and the interplay between bankruptcy and divorce law courts can be confusing. 

What is Equitable Distribution?

"Equitable distribution" means that rather than splitting assets down the middle, the court will look at how the divorce will affect each spouse financially.  The final distribution of assets (and liabilities) is much more flexible than in community property law states, and factors that are taken into consideration include:

• Each spouse's earning potential
• Individually owned property by spouses respectively
• Which spouse earned the money to purchase assets
• Who will be responsible for any children from the marriage
• Any financial indiscretions on the part of the marriage partners

All except nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) employ equitable distribution laws. 

Bankruptcy and Divorce

Filing for bankruptcy means that all debts are placed on an "automatic stay" and any collection activities against the debtor must be ceased.  However, debts in the following categories are exempted from the stay, and may still be collected on by the parties involved (specifically, the marital partner that is filing for divorce):

• Debts resulting from a paternity suit
• Alimony, maintenance, or child support debts
• Collection of the above debts from the "property of the estate" (chapter 7 bankruptcy only)

In a chapter 7 bankruptcy, post-petition earnings and assets acquired after the bankruptcy filing, are not considered part of the bankruptcy estate and are thus "fair game" for creditors collecting on debts.  In a chapter 13 bankruptcy, on the other hand, these things are considered part of the bankruptcy estate, and anyone wishing to collect on debts using them must apply to the bankruptcy court to do so. 

The Bottom Line

What it all means is this:  no matter whether the bankruptcy was filed before, during, or after divorce proceedings, the automatic stay means that all collection efforts must cease.  The exception to this is chapter 7 post-filing earnings and assets acquired, which can still be used to pay the above debt collections.