The Effect of Bankruptcy on Divorce

By Monica Peters

The Wright Firm, L.L.P.

It is said that the most common cause of marital discord is financial stress.  It should be no surprise then that frequently during the divorce process, one or both parties consider filing for bankruptcy.  Before deciding if and when one will seek relief under the federal Bankruptcy Code, it is important to understand several things.

First, once a bankruptcy is filed the federal bankruptcy court has sole legal control of all of the debtor’s assets.  While most if not all of a debtor’s assets are typically protected by law from seizure by a trustee for the benefit of the creditors, those assets are still considered a part of the bankruptcy estate.  This is important because it means that the debtor cannot sell or transfer any of this property without first acquiring the consent of the trustee or the bankruptcy court.  It also means that the trial court handling the divorce cannot divide the assets of the marital estate without the bankruptcy court first granting permission.  Until the trial court can divide the debts and assets of the estate, it cannot grant a divorce.

The good news is that the debtor and the debtor’s spouse do not necessarily have to wait until the bankruptcy is final before proceeding with the divorce in state court.  While waiting is an option, it is typically not a very good option, particularly if the debtor has filed under Chapter 13 of the federal Bankruptcy Code, as these cases typically take five years to complete.  The solution is for an attorney for one of the parties in the divorce to file a Motion to Lift Stay, requesting the federal court to grant the state court permission to proceed with a division of the community debts and assets.  The federal court will almost always grant a Motion to Lift Stay in this circumstance, particularly if all of the debtor’s property has already been established as exempt from sale to pay the debtor’s creditors.  Once the federal court has signed the order granting the Motion to Lift Stay, the divorce may proceed as usual in the state court.

The state court does not completely have its hands tied while it awaits the order lifting the stay.  The state court may proceed on any issue regarding the best interests of the children of the marriage, including but not limited to ordering the payment of child support by either party, conservatorship, and possession and access.  The state court can also make temporary orders regarding spousal support, the payment of expenses, and the use of property during the pendency of the suit and for the preservation of that property.  However, until the federal court has entered the order lifting the stay, the state court cannot make any orders that would divest either party of an interest in a piece of property, such as ordering that property be sold.

Prior to filing for bankruptcy during a divorce, it is important to consider if it is better to wait until after the final decree of divorce has been entered. If a Chapter 7 Bankruptcy is filed, then the debtor’s debts will be discharged within approximately four months from the date of filing the bankruptcy, assuming that the bankruptcy is handled properly. If the order discharging debts is received prior to the entry of the final decree of divorce, then it is possible that the trial court will decide that the community debts remaining should still be divided equally between the parties.  Then the party who had filed for bankruptcy could end up being ordered to pay half of the debts in the opposing party’s name.  That order would be enforceable by the state court.  Had the debtor simply waited to file for bankruptcy until after the divorce had been finalized, the debtor would have discharged much of the debt he or she had been ordered to pay by the state court and would only be left to pay any debt that he or she was ordered to pay and which was either a joint debt or a debt in the other party’s name.

Understand that, even if a bankruptcy is filed after the entry of the final decree of divorce, the bankruptcy will only discharge those debts held solely in the name of the debtor.  Therefore, any joint debts or debts in the debtor’s ex-spouse’s name will remain collectible.  If the debtor were ordered in the final decree of divorce to pay any of these kinds of debts, they still must be paid by the debtor.  While it is true that the creditors will not try to collect these debts from the debtor, the creditors will almost certainly seek to collect these debts from the debtor’s ex-spouse, or at least will file a negative report on the ex-spouse’s credit report.  The debtor will be in violation of the final decree of divorce and the ex-spouse may file a Motion to Enforce, seeking the payment of the debts as well as any other damage he or she incurred including attorney’s fees and court costs.  Further, filing for bankruptcy does not discharge debts owed for spousal support, child support, medical support or any other domestic support obligation.

There are many things to consider prior to filing for bankruptcy.  The questions become significantly more complicated when the bankruptcy is intertwined with a divorce case.  That is why it is so important to ensure that one consults an attorney who is experienced in the area of bankruptcy before filing any documents with the federal court.  However, done correctly, bankruptcy can be an excellent tool for rebuilding one’s life after a divorce.

About the Author:

When Monica Peters chose to move to the Dallas-Fort Worth area to begin her practice of family law, she brought with her the common-sense, straightforward approach to life that marks so many of those who live in her native home. Ms. Peters was born and raised in rural West Texas on a sheep and cattle ranch that has been owned and operated by her family for six generations.

 After graduating from law school, Ms. Peters joined The Wright Firm, L.L.P. as an associate attorney. Ms. Peters has devoted her practice to issues involving children and families, as well as to the practice of bankruptcy law. She has handled the entire spectrum of family law issues, including but not limited to divorce, property division, spousal support, child custody, child visitation, conservatorship and child support. She has also represented both children and parents in cases involving the Department of Family and Protective Services. She has further assisted countless clients struggling with debt to attain a new beginning financially through bankruptcy relief.  While Ms. Peters has assisted many of her clients in reaching amicable resolutions to their cases through both mediation and informal settlement methods, she has also successfully represented her clients in countless contested hearings and final trials.