How Bankruptcy Can Affect Divorce Proceedings

It’s not unusual for bankruptcy and divorce to go hand-in-hand or for one to prompt the other. What impact does bankruptcy have on divorce proceedings and what can family law attorneys do to manage a divorce in the face of bankruptcy?

It is not uncommon for a couple to cite divorce as the reason for a bankruptcy filing, but when the bankruptcy is filed can impact the divorce proceedings, making them more or less complicated and lengthy. In general, filing for bankruptcy protections prior to the divorce can be more cost-effective and lead to a smoother divorce, but what happens when bankruptcy is filed by one spouse in the midst of divorce proceedings?

An Automatic Stay On Property Division

Filing for bankruptcy in the middle of a divorce will effectively stop any divorce proceedings related to division of property or assets. Assets become property of the bankruptcy estate. When this happens an automatic stay on property division goes into effect. This stay prohibits all actions related to property of the bankruptcy estate, including the action of dividing property during a divorce.

However, even though there is a stay on the division of property, child support and child custody decisions are not affected. Any type of family support, whether it is alimony or child support is considered non-dischargeable in bankruptcy.

The Effects Of Chapter 7 Vs. Chapter 13

Whether Chapter 7 or Chapter 13 protections are filed can impact divorce proceedings, too. In both cases a trustee is appointed to administer the case, but their powers differ depending on the filing. This impacts how they administer the bankruptcy case and can impact a divorce case.

  • Chapter 7 Bankruptcy. Under this form of liquidation bankruptcy the trustee can sell assets to pay creditors. If bankruptcy occurs during divorce proceedings, the trustee determines what assets belong to the estate and if they should be sold. In the case of joint property, the trustee may sell the entire asset. Chapter 7 bankruptcies are usually discharged after only a few months, so they can be completed quickly, but there are income limits to Chapter 7 filing which may impact whether the client is able to file jointly or is better off waiting until after the divorce to file as a single household.
  •   Chapter 13 Bankruptcy. Trustees under Chapter 13 protections do not sell assets to pay creditors, but will instead develop a repayment plan based on the value of the assets. Chapter 13 repayment plans usually take between 3 and 5 years to complete. Due to this, divorcing spouses will need to obtain permission from the bankruptcy court to continue dividing property in the divorce.

In either situation, filing for bankruptcy during a divorce has the potential to delay and complicate proceedings.

Get A Clear Picture Of The Impact Bankruptcy Will Have On A Divorce With Easysoft’s EasyFamilyLaw Suite

It is hard enough to navigate through divorce proceedings when there isn’t a bankruptcy involved. When bankruptcy is a factor, it’s even more difficult. But there is no reason to wait until the bankruptcy has been finalized to proceed with the divorce. The EasyFamilyLaw Suite makes it possible to examine child support and alimony options while removing the question of asset valuation from the equation. The Lifestyle Expenditure Document helps prove monthly income needs while the FamilyDocs Module provides you with all the forms you need to manage the divorce. Create retainer agreements, pleadings, and orders, develop different support scenarios to find the best solution, and calculate the tax impact the divorce will have on your client using the Suite.

The EasyFamilyLaw Suite makes it possible for you to proceed with the divorce process despite a bankruptcy filing, but it can aid you if a bankruptcy filing is made during the divorce negotiations, too. The pension valuation and asset and liability distribution features of the software can be used to identify assets that will be frozen by the bankruptcy filing. The tool is extremely thorough, providing a step-by-step guide to identifying, valuing, and assigning ownership of assets. This can help speed up the asset identification process required by the bankruptcy and help prevent the filing from complicating or delaying the divorce. The information obtained through the software can even be used by spouses ahead of filing to determine if it would be more advantageous to file for bankruptcy first or finalize the divorce first.

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