Divorce and Filing for Bankruptcy (part 2)

The first part of this discussion on bankruptcy gave an overview of the bankruptcy process and how it applied to couples who were still married. The second part will discuss the impact of bankruptcy when a couple separates or divorces.

What Happens If a Couple Separates?

In some respects, if a couple separates but remains married, the effect of one spouse filing for bankruptcy is not much different than if they lived together. Assuming the debtor spouse filed individually, the nonfiling spouse might find that certain marital property was considered part of the bankruptcy estate. While the debtor spouse could wipe away a substantial portion of his or her debts, the nonfiling spouse would still be responsible for his or her separate debts.

The above may depend upon how long the couple has been living apart. If the debtor spouse waits several years after the separation to file for bankruptcy, it is more likely that the bankruptcy court and trustee will view the nonfiling spouse’s property as separate property, not marital property that is part of the bankruptcy estate.

Nonfiling spouses who have received a legal separation, on the other hand, have a situation that is very similar to divorce. The court has already ruled on division of the spouses’ property, alimony, child support, custody, and visitation.

If the couple is in the middle of bankruptcy when they file for a legal separation, the bankruptcy estate remains in effect. In the case of a Chapter 7 bankruptcy, that is because the pre-bankruptcy estate has already become property of the trustee. In the case of the years-long Chapter 13, the debtor spouses may only need to adjust their payment plan to account for changes in their incomes and living arrangements

What Happens If a Couple Divorces?

If joint debtors going through a bankruptcy file for divorce, as with a legal separation, it is possible to keep the bankruptcy estate in effect. The couple might seek to create two different bankruptcies, however, through the act of “severing” the joint debtor. To do this, both spouses ought to ensure that the marital debt is split equitably so it can be applied to each case.

If an ex-spouse files for bankruptcy after divorce, then more issues come up. Can this spouse have obligations to pay alimony or back child support “discharged” like so many other debts? Fortunately, no. Since 2005, the federal bankruptcy code has forbidden debtor spouses from discharging any debts owed to “a spouse, former spouse, or child of the debtor.” Instead, if an ex-spouse files for Chapter 13 bankruptcy, he or she would be required to pay the child support through the court-mandated payment plan.

However, the nonfiling spouse going through a divorce has other concerns. First, if the debtor spouse files for bankruptcy during divorce proceedings, the automatic stay brings divorce proceedings to a halt until the bankruptcy is dismissed or discharged, unless the nonfiling spouse is able to obtain what is known as “relief from automatic stay.”

Moreover, while the nonfiling ex-spouse might have thought that the divorce meant a break from the other spouse for good, creditors might think otherwise. For instance, if the couples used one credit card during the marriage and that card remains in both of their names, the nonfiling ex-spouse might be pursued by credit card companies for full payment of the debt. That is because they cannot pursue the debtor ex-spouse, who is protected by bankruptcy’s automatic stay, and because their joint names on the card mean that each spouse is 100 percent responsible for paying the debt. This could also happen if the couple were still married, but it is all the more shocking when it follows a divorce.

Meanwhile, the debtor ex-spouse has problems, too. Not only is he or she still responsible for alimony and child support payments, but filing after divorce may also affect his or her property exemptions, possibly making some property “nonexempt” that would have been exempt from liquidation otherwise.

If a Colorado couple is planning to divorce, it is far more preferable that they file for bankruptcy before the divorce than after, as the process is much cleaner.

If you are planning to divorce, it is crucial to have a knowledgeable Colorado family law on your side. Contact the experienced Denver family law attorneys at Plog & Stein.

Related Posts:

Division of Property During Divorce in Colorado

How Business Interests Are Divided in Colorado Divorce Cases

Gifts and Property Division During a Colorado Divorce