For those divorcing or divorced, the bankruptcy issues generally fall into three categories: (1) the payment of child support and alimony after a bankruptcy has been filed; (2) the enforceability of a property settlement agreement after a bankruptcy has been filed; and (3) payment of joint credit card debt if only one spouse files for bankruptcy.
For in-depth information on bankruptcy during divorce, see Bankruptcy Considerations for Married Couples on Nolo.com.
Any support, whether it is called family support, alimony, or child support, is made non-dischargeable (the debt can't be eliminated) in bankruptcy by the Bankruptcy Code. The spouse who receives the support does not have to file any type of proofs of claims or objections to the Bankruptcy Court to enforce her rights to continue to receive support. In most cases, once a debtor files for bankruptcy, all creditors must stop all actions to collect their debts. This block is called an “automatic stay.” The automatic stay stops all foreclosures, garnishments, bank levies, and creditors from calling you at all hours of the night. The automatic stay does not apply to the enforcement of the collection of child support or alimony. These types of obligations have a super priority under the Bankruptcy Code.
Any garnishment order(s) that collect past due support may be stayed in Chapter 7 bankruptcy and in Chapter 13 bankruptcy. The husband will be able to propose a repayment plan to repay the child support arrears in a Chapter 13 case.
In most cases, the family court will not hear the support motion until the bankruptcy case is finished. Some judges will rule on the motion, and hold that the automatic stay does not bar the family court from considering the motion. Other judges will require the moving party to obtain stay relief. In simpler terms, stay relief means that the Bankruptcy Court issues an order that permits the moving spouse to continue her family court motion requesting an increase in support. In the majority of cases, a Bankruptcy Court routinely grants these types of motions.
If one spouse files for bankruptcy, the family court can still continue to hear and decide issues relating to establishing support. However, with regard to issues of equitable distribution, the family court will require stay relief, or a Bankruptcy Court order that permits the divorce case to continue. Basically, the family court will not split up the family home, divide pensions, and apportion any stocks or mutual funds until it receives permission from the Bankruptcy Court.
Section 523(a)(5) of the Bankruptcy Code now makes all support obligations non-dischargeable (the debt cannot be eliminated). In addition, all property settlement debts that are owed to a spouse, former spouse, or a child of the debtor are non-dischargeable in a Chapter 7 bankruptcy. Therefore, a non-debtor spouse is no longer technically required to file an adversary complaint to block a debtor spouse from trying to bankrupt debt that is owed under a property settlement agreement. However, it is my professional opinion that a prudent non-debtor spouse should still file an adversary complaint. A non-debtor spouse should make certain that a debtor ex-spouse is not successful in his or her efforts in trying to discharge marital debts that are owed under a property settlement agreement. Due caution should be exercised until the bankruptcy laws on these issues are settled.
To get an overview of the issues affected by the timing of a bankruptcy and divorce, please see Divorce & Bankruptcy: Which Comes First?, on Nolo.com
If one spouse files for bankruptcy and the other spouse does not file, then the credit card company will “go after” the spouse who did not file. When spouses obtain a credit card, they usually sign a contract holds both parties jointly and severally liable. Basically, this means that if one spouse should die or files for bankruptcy, then the other spouse is liable for the entire credit card debt. The credit card companies do not care whether it is fair to collect the debt from you or from your ex-spouse, even if the charges were incurred by your ex-spouse. The credit card company is possessed with only one objective, and that is to collect money.
In general, filing for bankruptcy will not affect your spouse's property. Unfortunately, the answer is not so easy if you own property with someone else, including your spouse. Whether the Trustee may take only your interest in the property or all of the property depends on the nature of your ownership in it. If you own property jointly with anyone, including your spouse, the Trustee may take your share. The Trustee cannot take the joint owner's share. However, dividing the property between the joint owner and the Trustee may require that the property be sold. You should be able to keep your SEP, IRA, and 401(k) plans. In New Jersey, IRAs are exempt – except for deposits made within six months before filing – and EISA plans (which 401(k) and other retirement plans would ordinarily be) are also protected – if the documents that created them contain properly drafted spendthrift protection. In New Jersey, the cash value in life insurance is exempt up to a certain amount, if you name the proper beneficiaries and meet the other requirements to claim the exemption.
The Bankruptcy Court has declared obligations to pay spousal support and attorney fees, awarded as additional spousal support, as non-dischargeable pursuant to 11 U.S.C. § 523(a)(5). Van Aken v. Van Aken, 2005 Fed. App. 0001 (6th Cir. 2005). If an ex-spouse tries to discharge a counsel fee award, the non-debtor spouse should file for an adversary proceeding with the Bankruptcy Court. Basically, the adversary proceeding will request that the Bankruptcy Court set the dispute down for a hearing. Thereafter, the Bankruptcy Court will decide whether the counsel fee award is a form of support and is non-dischargeable. Alternatively, the Bankruptcy Court could determine that the counsel fee award is a form of equitable distribution which can be discharged. Moreover, the Bankruptcy Court could order that the payment terms of the counsel fee debt be restructured.
Each person has (or is supposed to have) a separate credit file for credit reporting purposes. Your debts, if yours alone, are not supposed to appear in your ex-spouse’s credit file. Similarly, your bankruptcy should not appear in your ex-spouse's file if you have no joint debts. Even so, it pays to monitor your credit file.
It is advisable to insert clauses into a property settlement agreement or a divorce judgment that limit the impact of a bankruptcy. Clauses that will give a spouse a right to reopen a case if a spouse has filed for bankruptcy may be put into settlement agreements. Some sample clauses are as follows:
In the event of the declaration of bankruptcy by the Wife or Husband, then, in that event, said party shall continue to remain personally liable to the other for any and all expenses incurred by that other party in connection with the defense of any suit instituted by a creditor or in connection with the payment of any monies to said creditor. It is the intention of the parties that any bankruptcy filed should be effective as against the creditor but shall not be intended to act to the financial detriment of the other spouse. The parties further agree that in the event a financial detriment to the other spouse is encountered as a result of the bankruptcy laws, then any provisions regarding equitable distribution and/or alimony shall be modified as to compensate the aggrieved party for the financial loss.
It is the intent of the parties that the obligations assumed by each in this Agreement, including any and all indemnifications, shall not be dischargeable in any future bankruptcy proceeding. The parties recognize that the support and equitable distribution provisions are interrelated; in the event one party is called upon to make payment on a debt, or fails to make payment to the other of an asset, as provided herein, such a circumstance would be considered a significant change in circumstance, warranting an application for a modification of the support provisions provided for herein, as well as a redistribution of assets and liabilities in order to effectuate the overall intent of this Agreement. As a result of the interrelationship between the support and equitable distribution provisions of this agreement, it is the intent of the parties to consider the payment of debts and transfer of assets, including indemnifications, to be in the nature of alimony, support, or maintenance for purpose of interpretation under the Bankruptcy Code. Moreover, the parties acknowledge that the benefit to the defaulting party of discharge of any obligations hereunder in any future bankruptcy proceeding will not outweigh the detrimental consequences to the no-defaulting party. As a result, it is the intent of the parties that the obligations assumed hereunder shall not be dischargeable in any future bankruptcy proceeding.