Divorce and Bankruptcy

Divorce and Bankruptcy - by Henry Gornbein

In these troubled economic times, more and more people are turning to the protection of the U.S. Bankruptcy Code to resolve their debts and protect their property from foreclosure and repossession.More than 1 million people filed bankruptcy last year alone, and the numbers are only climbing as the recession hits homes.

Some people are finding that in order for them to save their homes from foreclosure or to gain control of their bills, they need to file bankruptcy in the middle of their divorce.

This can lead to many questions as the legal proceedings of bankruptcy and divorce intersect.

Read on to get answers to some bankruptcy and divorce questions you may have.

What Happens to Property if My Spouse Files Bankruptcy?

When a spouse decides to file bankruptcy, all property acquired during the marriage becomes a part of the bankruptcy estate.

That property may be sold by the bankruptcy court in order to repay debts, depending on which type of personal bankruptcy is filed (Chapter 7 or 13).

But don’t panic—in many bankruptcy cases, most property is considered exempt and the debtor gets to keep all or most of his or her assets.

In any case, you and you’re spouse’s property may not be divided by the divorce court until the bankruptcy trustee decides whether the property is exempt.

Bankruptcy & the Automatic Stay: Could it Help Me?

When a person files bankruptcy, they receive the protection of the bankruptcy automatic stay, which is a legal order that prohibits creditors from trying to collect on most types of debt.

The bankruptcy automatic stay can stop:
foreclosure
repossession
utility shutoffs
direct credit contact (calls & correspondence)
some wage garnishments and lawsuits

When the new bankruptcy law went in effect in 2005, it ruled that a former spouse’s obligations can’t be discharged through bankruptcy.

As a result, the bankruptcy automatic stay does not stop you from paying alimony or child support and it doesn’t stop a spouse from asking the divorce judge to order you to pay alimony and child support.

I’m Filing Bankruptcy and Getting Divorced, Should I File Jointly?

If you’re getting divorced and about to file bankruptcy, filing jointly may just be something to consider.

When a couple jointly files bankruptcy, it can make the final division of remaining assets easier. Also, filing joint bankruptcy is typically cheaper than filing bankruptcy as separate individuals.

But it’s important to keep in mind that whether you’re filing bankruptcy before, during or after a divorce, a bankruptcy filing will likely have an impression on your divorce case and will likely affect the your finances and property.