How Does a Bankruptcy Filing Affect Your Divorce Proceedings

In Separation & Divorce, Uncategorized, Wealth by Carly Baker

Financial troubles are often a stressor that factors into the end of a marriage. As hard as people try to repay their debts—such as their mortgage, credit cards, car loans, or medical bills—once they are underwater, it is hard to get back to the surface. Some people try to shift debt by opening a credit card to pay off another one, while others sell property or cash out their retirement; but unfortunately, growing interest obligations can render their efforts moot. It can all push a relationship to its breaking point

If a couple decides to separate and divorce, debt plays a big role in determining how property and spousal support will be resolved. If the debt is insurmountable, then one or both spouses may consider bankruptcy relief as a feasible option of debt relief. If this sounds familiar, then you should know what to do if bankruptcy is filed during your divorce.

Chapter 7 and Chapter 13 Bankruptcy

Two of the popular bankruptcy proceedings for consumers include Chapter 7 and Chapter 13. Chapter 7 bankruptcy proceedings allow qualifying debtors to obtain a discharge from most types of unsecured debts within several months. In contrast, Chapter 13 allows for a repayment plan in which the debtor makes regular payments for several years to pay off creditors.

Significantly, either type of bankruptcy filing affords the debtor an “automatic stay” which provides a temporary injunction against any creditors and certain pending legal proceedings. In the past, this automatic stay was used as a weapon in divorce proceedings to prevent a spouse from collecting spousal support, child support, or property while the stay was in effect. In other words, a spouse would file for bankruptcy during the time period between separation and divorce. For spouses dependent on this financial support, this strategy could cripple their ability to make ends meet while waiting to finalize their divorce, and give the other spouse tremendous leverage.

Bankruptcy Abuse Prevention Act

In 2005, Congress determined that this conduct was potentially abusive and passed the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.” Amongst the protections this created was an exemption from bankruptcy’s automatic stay for state proceedings involving child custody, child support, and spousal support. This means that even if bankruptcy is filed, state courts are still within their discretion to decide matters relating to these significant legal issues.

Contact New Direction Family Law

New Direction Family Law provides legal representation to men and women who want to a resolution to the end of a marriage or a child custody issue. Our attorneys understand that these resolutions have a significant impact on our clients’ ability to move forward into the future. We therefore offer smart, thoughtful, and effective representation with their legal interests at the forefront of our minds. We proudly serve clients in Wake, Johnston, Durham, and surrounding counties. Call (919) 719-3470 to schedule a consultation, or contact us online at our website.