How Does Divorce Impact My Bankruptcy Case?

Written by rpbstaging on December 21, 2020. Posted in Divorce.

By: Alex Coomer

www.alexcoomerlaw.com

November 24, 2020

It is a sad reality that financial stress is a major cause of marital problems. Similarly, marital stress or living within an unhappy marriage can lead to bad financial decision-making and debt. Either way it goes down, bankruptcy and divorce law often overlap. When these sad and difficult situations occur, there is a complex interplay between two different types of law that generates a lot of confusion. This FAQ article seeks to provide very basic information and help you understand the issues when divorce and bankruptcy overlap.

Disclaimer — Both divorce and bankruptcy are complex fields of law in their own distinct forms. And, when these two areas of law mingle together, it gets even more complex. Therefore, if you are presently going through or contemplating both divorce and bankruptcy, it is highly advised that you seek legal representation immediately.

What is community debt and community property?

To understand the interplay of divorce and bankruptcy, it starts with a simple understanding of community debt and community property.

Arizona is a community property state. This means that any property (other than gifts or inheritances) you and your spouse acquired during the marriage belongs equally to both parties and any joint debts incurred during the marriage are the equal responsibility of both parties. It does not matter whether one spouse worked during the marriage and the other did not. Community property includes real property, personal property, money, stocks and bonds.

All debt incurred during the marriage, no matter by whom, is generally considered to be the community debt of both parties. This is true even if the debt was incurred for purchase of an item that only one of the parties uses. As with community property, generally, debts owed by one party prior to the marriage remain a separate debt of that party and do not become transformed into a community debt just because the parties got married.

If I am contemplating filing for bankruptcy AND divorce, should I get divorced before, after, or at the same time as my bankruptcy case?

This is a very difficult question to answer and there is no one set answer to this question.

The best strategy for you and your family here will depend on the nature of your debts, assets, and relative level of cooperation you have with your soon-to-be ex-spouse. As there are many variables to consider here, there is not one conventional strategy that fits most people.

With the understanding that every case is different, here are some important things to keep in mind in terms of timing, logistical issues, and costs of the two legal processes.

If you file your bankruptcy case prior to divorce, you will be able to lawfully double your exemptions pursuant to the bankruptcy code as a joint-filing couple. This could be meaningful to your family if, for example, you own fairly nice furniture (worth more than $6,000) that you do not intend to divide equally or if your family owns a single vehicle that has substantial equity (between $6,000 and $12,000).

If you file your bankruptcy case prior to divorce and wish to only hire one attorney to represent both debtors to save on fees and costs, there are serious ethical considerations regarding conflicts of interest to consider in this situation. As such, you can really only consider filing for joint bankruptcy with one attorney prior to divorce if the parties are amicably divorcing and without controversy on splitting of exempt marital assets. Keep in mind that non-exempt assets will be frozen when filing for joint bankruptcy before getting divorced. Only exempt property will be eligible for division between the spouses.

If there are disputes about finances leading into the bankruptcy or disputes over property, it is not advised for one attorney to represent both parties in the bankruptcy. In this case, like your divorce case, it would be advised that the parties retain separate counsel and file separate bankruptcy cases in conjunction with divorce litigation that splits exempt marital assets.

One of the worst steps to take is filing for bankruptcy in the middle of divorce proceedings without consulting with qualified lawyers. In most cases, filing for bankruptcy will put the divorce proceedings on hold and may only continue once the bankruptcy case is completed or if a divorce attorney files a motion to move forward with the legal separation. In these situations, communication is king. It is critical to keep all attorneys up to date with all relevant developments, including financial stress.

Don’t forget that community debt acquired during the marriage becomes joint debt, even after the divorce was finalized. The divorce will also lead to the apportioning of the debt between the two spouses. As such, the creditors may still go after the spouse who did not file for bankruptcy and demand debt payments. Therefore, it is advisable that two separate filings be done after the divorce to keep creditors from pursuing one of the spouses.

My ex-spouse owes me money and I got notice that he/she is now filing for bankruptcy. Can my ex-spouse discharge alimony or child support payments owed to me in bankruptcy?

No. Alimony and child support are considered priority unsecured debt. Alimony and child support are a special form of debt. This type of debt is paid first by debtors under repayment plans in Chapter 13 and cannot be discharged at all in a Chapter 7 bankruptcy.

If you receive notice that your ex-spouse has filed for bankruptcy and you are listed as a creditor, you have rights that you should understand. If you have questions, concerns, or want representation to protect your rights, it is highly advised you consult with a creditor lawyer immediately upon learning of the bankruptcy filing by your ex-spouse who owes you money.

Can my ex-spouse discharge personal loan debts that they owe to me from prior to our marriage?

Yes. If you loaned your spouse money at some point prior to marriage, this is considered unsecured non-priority debt. If your ex-spouse files for Chapter 7 bankruptcy and lists this loan correctly, this type of debt can be discharged by the borrowing party.

What if he/she promised me over and over that he/she would pay me back?

Unfortunately, a subsequent promise to repay does not change anything in a bankruptcy case. Barring some unusual exception, such as your ex-spouse committing fraud, personal loans given prior to marriage will be dischargeable debt.

Disclaimer: The information in this web site is not intended to provide legal advice or to create an attorney-client relationship; but is intended for general education and information purposes only. Laws change periodically, therefore the information in this site may not always be accurate. It is imperative that you seek legal counsel in order to determine your rights and obligations under the law and based upon your specific circumstances.

Alex Coomer Law, PLLC is a debt relief agency and helps people file for bankruptcy under the Bankruptcy Code. The material and information contained on these pages and any pages linked to from these pages is intended to provide general information only and not legal advice. You should consult with an attorney licensed to practice in your jurisdiction before relying on any of the information presented here. You are advised that the acts of sending e-mail to or viewing or downloading information from this website does not constitute an attorney-client relationship.