Bankruptcy & Divorce: What Is the Connection?
Divorce, job loss, and illness are the three biggest causes of bankruptcy. It is incredibly common for bankruptcy and divorce to follow closely upon one another. If you find yourself in the unfortunate but common position of considering both divorce and bankruptcy, one of the most important things you can do is talk about your bankruptcy with your divorce attorney and talk about your divorce with your bankruptcy attorney. There are some very technical ways that bankruptcy and divorce interact, and it is best to make sure that they are handled in coordination.
First, it is important to understand the differences between the two court systems:
Divorce and other family law matters are handled in State courts, usually in specialty family courts. Family courts do not have the authority to discharge or even alter liability for a debt owed to a third-party creditor. But family courts do have authority to alter the relationship between spouses and even assign responsibility for which spouse pays for a debt. Family court changes the relationship of the spouses, but not their relationship with the third-party creditors.
Bankruptcy is handled in Federal courts, in specialty bankruptcy courts. Bankruptcy courts have only limited authority to deal with matters decided in family courts. Bankruptcy cannot discharge any obligations to pay child support or spousal maintenance (also known as “alimony”). In some cases bankruptcy can discharge other allocations of assets or debts that were decided by the family court, but this will be dependent on the facts of the case and what language the family court order contains. Whether a debt created or allocated in family court can be discharged, bankruptcy does offer the ability in many cases to restructure or repay debts or obligations created by the family court in a less onerous way.
WHEN SHOULD I FILE FOR BANKRUPTCY?
Because Bankruptcy courts have little authority to alter debts that were allocated in a divorce decree, it is often in the best interest of both spouses to file bankruptcy jointly before proceeding with divorce. In addition to saving time and money by filing together before divorce, our clients often find that having debt discharged before filing for divorce simplifies the divorce proceeding, removes a point of conflict between the spouses, and helps the spouses to focus on the more important aspects of the impending divorce negotiations.
Sometimes, however, it is not possible to file bankruptcy before divorce. In these cases it is still possible for each individual spouse to file an individual bankruptcy after the divorce is completed.
WHAT IF MY SPOUSE DOES NOT WANT TO FILE BANKRUPTCY OR EVEN COOPERATE IN MY FILING BANKRUPTCY?
If your spouse does not agree to file a joint bankruptcy before the divorce, does not want to participate, or does not cooperate enough for you to file jointly, you may still file bankruptcy individually. In some cases, the best time for one spouse to file bankruptcy is before a divorce; in other cases the best time to file may be after a divorce. In this situation, it is very important to consult with a bankruptcy attorney before a divorce. Even if you decide to file bankruptcy after a divorce is finalized, it is critical to ensure that the divorce decree contains the right language to enable you to file bankruptcy and discharge debts after divorce.