Bankruptcy is both a tragedy and a relief. Divorce is exactly the same.  Many bankruptcy attorneys will recognize that the two legal forms of relief, divorce and bankruptcy, often go hand in hand.  Because of this, attorneys who practice bankruptcy law need to have a solid knowledge of how a bankruptcy can affect a divorce and vice-versa.  

 

 

The Automatic Stay

 

When a bankruptcy is filed, an automatic stay is put on any pending litigation regarding the petitioners and/or their assets.  

 

The bankruptcy automatic stay applies to divorce actions as well. 

 

Of course, people’s lives cannot remain in limbo for the months or years of a bankruptcy’s pendency. The bankruptcy code provides exceptions to the automatic stay for family law cases. Those exceptions to the automatic stay are as follows: 

 

• Establishment of paternity ; 11 U.S.C. §362(b)(2)(A)(i)
• Establishment or modification of an order for domestic support obligations (child support or alimony); 11 U.S.C. §362(b)(2)(A)(ii)
• Custody of visitation; 11 U.S.C. §362(b)(2)(A)(iii)
• Getting the actual divorce decree (unless the proceeding seeks equitable distribution of property of the estate); 11 U.S.C. §362(b)(2)(A)(iv),
• Domestic violence. 11 U.S.C. §362(b)(2)(A)(v).

 

Essentially everything in a divorce case EXCEPT for the division of assets and debts is stayed by a bankruptcy.  

 

Only assets and debts classified as “marital” can be divided in a divorce.  Other non-marital assets are automatically allocated by divorce courts to their respective owners. The bankruptcy stay applies to this automatic allocation of non-marital assets as well. 

 

Additionally, each local court is likely to have it’s own local rules as to how they handle a divorce during a bankruptcy.  Divorces subject to an automatic stay are usually put on a “bankruptcy calendar” where they sit in limbo until someone checks in on them.  

 

If the bankruptcy is not a quick chapter 7, a bankruptcy lawyer is going to have to file a Petition for relief from the automatic stay with stipulations from the parties in order to resolve the division of the divorcing parties’ assets. 

 

 

Bankruptcy Does Not Discharge Support Debts

 

If a bankruptcy client is already divorced or even separated, their support obligations (child support or alimony) will remain as debt which is non-dischargeable in a bankruptcy. 

 

“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) does not discharge an individual debtor from any debt- to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit.” 11 U.S.C. 523(a)(15)

 

While not dischargeable, the payment of support obligations and debts can be included in a Chapter 13 plan and thereby reduced for the duration of the plan. 

 

 

When One Divorcing Spouse Files For Bankruptcy And The Other Spouse Does Not

 

Marital debts are divided by divorce courts.  When one spouse files for bankruptcy they are not obligated to pay those debts…whether they are deemed marital or not.  The supremacy clause of the U.S. constitution lets federal bankruptcy law trump whatever is ordered by a state divorce court. 

 

Because of this, divorces often end up being strategically written so that the bankrupt spouse is awarded the debt and no assets but some kind of ongoing support that creditors cannot touch. 

 

 

When A Bankruptcy Attorney Finds That His Clients Have Filed For Divorce

 

Bankruptcy law allows couples to file joint petitions for bankruptcy. The couples often sign a joint contract with their bankruptcy attorney.  After the bankruptcy attorney finds that his clients now have alleged that they have irreconcilable differences in the local state court, that bankruptcy attorney is likely obligated to withdraw his representation or have the parties sign a new contract with him acknowledging their pending divorce and the possible conflict the bankruptcy attorney may have in representing both of them.  

 

The divorce can always be delayed until the chapter 7 bankruptcy is over.  In fact, the automatic stay requires that the divorce be delayed.  This will allow the couple to maintain their joint petition for bankruptcy.  

 

A divorce will almost always be finalized before a Chapter 13 bankruptcy is finalized. The compliance with the Chapter 13 bankruptcy plan should be addressed in the final divorce decree. 

 

 

The author, Russell Knight, is a divorce lawyer in Chicago, Illinois