How Divorce Can Effect Bankruptcy Proceedings

2019/02/25

A marital discord that leads to separation is bad not only for your emotional health, but it can also cause financial difficulties that might lead to bankruptcy. Going for bankruptcy and divorce at the same time is a complicated issue. If you are simultaneously on the verge of divorce and bankruptcy, it is necessary to consider whether divorce should precede your bankruptcy petition or whether you should start your divorce proceeding after filing bankruptcy.

Bankruptcy petitions are filed either under chapter 7 or under chapter 13 of the Bankruptcy Code. Bankruptcy under chapter 13 enables a person to prevent foreclosure of properties. Through a debt repayment plan, you make your payments within three to five years. In bankruptcy under chapter 7, the trustee appointed by the bankruptcy court sells the non-exempt assets of the debtor, and the proceeds of the sale are distributed among the creditors.

File A Bankruptcy Petition

You can file a bankruptcy petition either alone or jointly with your spouse. After the bankruptcy petition is filed, all your properties, including the ones that accrued during marriage, will be used for paying your debts. The bankruptcy estate comprises of all your assets that you owned individually or jointly with your spouse at the time of filing the bankruptcy petition. If you did not get a divorce before filing the bankruptcy petition, the properties that you hold jointly with your estranged spouse will become a part of the bankruptcy estate.

As soon as you file the bankruptcy petition, an automatic stay comes into force, which prevents creditors from collecting the pending dues. However, this will not prevent you from paying alimony or child support as ordered by the divorce court.

Alimony and child support payments will increase your expenses. If you are seeking relief from your creditors under chapter 13 of the Bankruptcy Code, getting a divorce before filing bankruptcy could increase your expenses and reduce your income. This might help to reduce your debt burden.

In case of division of properties, in case of bankruptcy under chapter 7, assets exempted from liquidation could be divided between the estranged husband and wife. The exemption list varies from state to state. Usually the debtor is allowed to keep household appliances, reasonably necessary clothing, furnishings and household goods, jewelry up to a certain value, automobiles up to a certain value, pension, and professional tools up to a certain value, social security and unemployment benefit in the bank account, unpaid wages and damage claims owing to personal injury.

A bankruptcy discharge would benefit you and as well as your estranged spouse, if both of you were joint owners of properties that are part of the bankruptcy estate. Reduction in the debt burden might bring down your ex-wife’s demand for alimony. On the other hand, without the debt burden now you might have enough money to meet your estranged wife’s alimony demand.

If your ex-spouse files a bankruptcy petition, an indemnity clause in the divorce decree could protect you from the creditors who might pursue you to clear the pending dues on joint debts. The clause would require your spouse to clear specific dues.

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