What Happens in Bankruptcy When There is a Divorce?

Couple With Money Issue And Debt. Sad Couple Fighting over bankruptcy in divorce.

Money troubles are a common cause for divorce. When families get behind on their debts, the stress caused by collections can sometimes push couples apart. But even if you separate, you may want to carefully consider what happens to bankruptcy before, during, and after divorce. By approaching your bankruptcy with a level head, you can save assets for you and your soon-to-be-ex-spouse to use in the future.

What Happens to Family Debts in Divorce?

In Connecticut, when a couple gets divorced, their debts, like their assets, will be divided fairly between the parties. As an “equitable distribution” state, this doesn’t mean that the total debt will be divided 50/50. Often, each spouse will be responsible for the debts they incurred or they benefited from. Family debts, like mortgages and car loans, may be divided or awarded to the party receiving the related property. In deciding how to divide up family debts in divorce, a Connecticut court can consider the:

  • Financial situation and future of each spouse
  • Length of the marriage
  • Occupation, employment, and skills of each spouse
  • Standard of living set during the marriage
  • Contribution of each spouse to the collected marital property
  • Health and general well-being

The Court can order one party to assume the debt. However, even if a joint debt is awarded to one spouse in the divorce, if both parties’ names remain on the account, the creditor may be able to pursue both spouses for collections. To avoid this you may be required to refinance a home or other property to remove the other spouse’s name from the debt. The spouse awarded the debt will also need to indemnify their former spouse for any collection actions against them.

Why You Might Want to File for Bankruptcy Before Your Divorce

If you and your spouse are facing substantial debts no matter what happens in your divorce, you may want to stay married for a few more months and file for bankruptcy first. Filing for bankruptcy jointly while you are still married can reduce filing fees, increase exemptions, and allow your family to retain more of your assets after the bankruptcy is over.

Finalizing your bankruptcy first can also make resolving your divorce easier. A Chapter 7 bankruptcy discharges most unsecured debt (like medical bills, credit card accounts, and unpaid utility balances). By erasing those debts from your ledger, you can make negotiating an equitable property settlement easier, reduce your divorce costs, and eliminate concerns either of you have about the other paying their share of the debts after divorce. In some cases, the cost of one household becoming two is a driving issue in a divorce case, and bankruptcy can help resolve it.

Can You File for Bankruptcy During Divorce?

Often, one or both spouses won’t have a clear picture of the family’s financial situation at the start of the divorce. You may discover that you need to file for bankruptcy after investigating your spouse’s assets and debts as part of the adversarial divorce process. Fortunately, the Bankruptcy Code makes it relatively simple to file for bankruptcy during divorce. Your bankruptcy petition will trigger an automatic stay, putting your divorce action on hold. This will allow the bankruptcy trustee to examine your finances and debts, liquidate any non-exempt assets, and satisfy or discharge your debts before the divorce is completed. Once the final discharge order is entered, your divorce can proceed to a final judgment without worrying about how to handle all that marital debt.

Can You Get a Divorce While in Bankruptcy?

That same automatic stay can work in other ways if you file for bankruptcy first and then want to get a divorce. Technically, the federal court’s stay prohibits a Connecticut court from entering an order, including a divorce decree, which divides property. But there are procedures which allow that, if it’s necessary. If you are pursuing a Chapter 13 repayment plan, your bankruptcy could take three to five years to complete. If you want to start and finish your divorce while your bankruptcy is still pending your bankruptcy attorney may need the bankruptcy court’s approval to be employed and file a motion for the bankruptcy court to approve your property settlement and allow your divorce to move forward.

Filing for Bankruptcy After Divorce

In other cases, the cost of living separately and pursuing the divorce is what pushes one or both spouses to file for bankruptcy. If you decide to file for bankruptcy after divorce, it is important to remember that, generally, obligations incurred in a divorce decree, including alimony and obligations to transfer property. That means you will still need to comply with your Judgment’s financial awards to your other spouse even while you seek debt relief from the federal bankruptcy court. However, if you are filing for a Chapter 13 bankruptcy, your attorney may also be able to account for those payments as part of your repayment plan, shifting more money away from other unsecured and dischargeable debts.

At Lawrence & Jurkiewicz, our divorce attorneys and bankruptcy lawyers focus our practice on helping people. We know how to make state and federal laws work for you to protect your assets and your interests before, during, and after divorce. We will meet with you to review your circumstances and advise you whether you should file for bankruptcy first, and how to protect yourself from a spouse not paying his or her fair share of the family debt. Our attorneys want to help you get a fresh start. Please contact us for a consultation or call us at (860) 264-1551.

Categories: Bankruptcy, Divorce