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Bankruptcy and Divorce

Because so many people going through divorce are under financial stress, they often think about the possibility of bankruptcy as a way to get control of everything. If you're thinking about bankruptcy, or more importantly, if your spouse is thinking about it, you're smart to pay attention to this information, because the way you word your divorce settlement can have a lot to do with how the bankruptcy affects your divorce, and vice versa. There's lots of information here on DivorceInfo on how bankruptcy and divorce affect each other.

I don't do bankruptcies. I think bankruptcy, like divorce, is an area that you can't do well unless that's about all you do, so I leave that to others. What I've concentrated on is understanding how bankruptcy and divorce fit together.

The first thing you need to understand, if you haven't already thought it through, is that there are several different kinds of bankruptcy. Beyond that, here are the way the issues settle out:

You're Not Alone

Most of us know that bankruptcy filings are up. Most of us don't know how much. Here's how the U.S. non-business bankruptcy filings have increased over time. This doesn't mean bankruptcy is a great idea. It does mean, though, that if you become involved in bankruptcy, you'll have more company than you would have had a few years ago.


 More women than men are filing bankruptcy these days, which is a significant change from history. Click here to get the specifics.

The Automatic Stay

The first and perhaps most important consequence of a person's filing for bankruptcy is the automatic stay. When you or your spouse files for bankruptcy, the automatic stay kicks in to stop all efforts to enforce the collection of debt. It is the exceptions to the automatic stay that are important in divorce. There's a separate page all about how the automatic stay works.

Support

A great deal of the material on this page deals with a bankruptcy term called "discharge." You'll also hear about "discharging" a debt, whether a debt is "dischargeable," and whether an action affects the "dischargeability" of a debt. Simply put, we're talking about whether the debtor can get rid of the debt - can get free of it.

Obligations from a divorce to pay support are not dischargeable in bankruptcy. Period. This includes payments to support a former spouse or minor children. The support obligations that are nondischargeable include child support, alimony or spousal support, and lawyer's fees from a divorce or to modify support.

A person (in bankruptcy terms, the "debtor") can file bankruptcy and can complete the bankruptcy process even while owing support. It's just that when the case is finished, the debtor will owe the support obligation with no change. The bankruptcy code section that governs this is 11 U.S.C. §523(a)(5).

Property Settlement

If an obligation from divorce is in the nature of property settlement, whether it gets discharged is a good bit less certain. They're presumed to be nondischargeable, but the debtor may be able to overcome the presumption and have them discharged. Overcoming the presumption requires a showing that the debtor cannot pay the debt and still take care of himself, his dependents, and his business, or that discharging the debt would result in a benefit to the debtor that outweighs the harm that would be caused to the former spouse or child by non-payment. The bankruptcy code section that governs this is 11 U.S.C. §523(a)(15). There's a separate explanation of Discharge of Property Settlement Claims in Bankruptcy.

What Doesn't Get Discharged

Here are the debts that don't get discharged in bankruptcy:

What You Can Do

If your spouse owes obligations to you after divorce, and if there appears to be a good chance the spouse will file bankruptcy, the implication is clear:

Support is good. Property settlement is bad.

What you need to do is to characterize as much of the obligation as possible in ways that makes it clear that it's intended for support, not property settlement. Note that the bankruptcy court will not be bound by what you call the obligation, but if you clearly call it support and it behaves like support, there's a good likelihood the court will find it to be support and will not allow discharge.

If there's no question that a portion of the obligation due to you is property settlement, though, no amount of verbal window-dressing will change it. So what can you do then?

Think security.

What you want to do is take a lien on one or more assets of value - preferably assets that are important to your spouse. Then if your spouse proposes later in bankruptcy to have the debt discharged, you can seize the property to pay the debt. It's messy, and you may get far less from the property than it's worth, but depending on how much equity the debtor has, the leverage of the lien should help to get the debtor's attention in bankruptcy. Click here to read about payment to secured creditors.

One last thought: if both of you are thinking about bankruptcy, you may want to file before you get your divorce. That way, you'll know when you divorce which obligations will be discharged, and you can each negotiate with full knowledge. In addition, filing before divorce will save you some money, because you'll pay for only one bankruptcy filing instead of two, and your divorce will be less complicated.

Other Pages About Bankruptcy Here on Divorceinfo.com

There's a good bit of information here on DivorceInfo.com about the way bankruptcy and divorce fit together:

Other Sites about Bankruptcy

There's a great deal of useful information on the web about bankruptcy. Here are the few of the sites that seem to me to be the most helpful.

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