The Intersection of Bankruptcy and Divorce

In Separation & Divorce, Wealth by Sarah Hink

Financial struggles and marital problems often go together. Relentless harassment from creditors, the inability to make ends meet, maxed out credit cards, and selling personal property just to pay off interest penalties can be a very real source of turmoil in a relationship. Regardless of whether either spouse is actually to blame, the stress and anger of the situation can easily become a catalyst to arguments and general unhappiness that can break the relationship.

If you and your spouse are considering a divorce and have overwhelming debt, it is important to speak with an attorney about the implications of bankruptcy on your divorce.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is among the most popular forms of debt relief. Essentially, a qualifying debtor who cannot repay her or his debts relinquishes personal property to a trustee, who uses the proceeds to repay creditors in order of priority. Significantly, this form of bankruptcy can wipe out medical debt, credit card debt, and other unsecured debt, while allowing the debtor to keep their home, vehicle, and other exempt property specific to North Carolina. Further, a debtor receives an automatic stay from collection actions during the proceedings and their debts are discharged within 6 months.

Bankruptcy as a Weapon

Unfortunately, bankruptcy has been traditionally used as a weapon when it comes to divorce. Spouses would take advantage of the automatic stay in bankruptcy to put a halt to proceeding relating to alimony, child support, and property division in order to keep assets away from the other spouse. Since bankruptcy proceedings are filed in Federal court, there was little that state courts and divorce attorneys could do to fight this tactic.

Fortunately, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which was designed, in part, to address this exact problem. Under this Act, civil domestic lawsuits, such as child support, alimony, and equitable distribution proceedings in state courts are all exempt from the automatic stay. This means that the state court can continue with their proceedings without unnecessary games and delay. In addition, a spouse cannot use Chapter 7 to discharge court ordered support or property division obligations.

Possible Benefits of Bankruptcy for Amicable Separations

On the other hand, for couples involved in an amicable separation and divorce, there are benefits to filing bankruptcy proceedings together prior to obtaining a divorce. These include: (1) a “marital adjustment deduction” that helps couples qualify for bankruptcy where they wouldn’t separately; (2) it saves money as there is one set of pleadings and one legal proceeding instead of paying for two; and (3) obtaining Chapter 7 bankruptcy prior to a divorce allows a couple to wipe out their debt prior to their equitable distribution proceedings.

New Direction Family Law

If you or your spouse are struggling with debt and are considering a divorce, it is important to speak with an attorney before taking legal actions on your own behalf. At New Direction Family Law, we understand how bankruptcy and divorce intersect, and how to protect your legal interests accordingly. We serve Wake, Johnston, Durham and surrounding counties. Contact New Direction Family Law at (919) 719-3470 to schedule a consultation with an attorney or reach us online through our website.

Sarah J. Hink
New Direction Family Law

New Direction Family Law
(919) 719-3470