Will a bankruptcy filing impact my divorce?
By: Sandy Durst, Esq.
Lynch, Osborne, Gilmore & Durst
A difficult economy often leads to divorce. Difficult financial times also result in an increase in bankruptcy filings. It is important that both you and your attorney understand the interplay between divorce proceedings and bankruptcy proceedings. Bankruptcy may be a viable, if not necessary, legal alternative for many people faced with credit card debt, declining real estate values, and unmarketable of real estate combined with unemployment. However, it is important to keep in mind how bankruptcy can impact divorce proceedings and financial obligations such as alimony, child support, and equitable distribution.
Divorce proceedings take place in State Court while Bankruptcy cases are heard in Federal Court. The assets and liabilities that comprise the marital estate may also comprise the bankruptcy estate. This overlap puts one pool of assets and liabilities under the jurisdiction of two courts.
Our legal system is structured in a way that the Federal Court and federal statutes take precedent over the State Courts. This means that although a divorce may be pending in the State Court and orders may have already been entered by the State Court, once a bankruptcy petition is filed many of the issues become subject to review and/or approval by the Federal Bankruptcy Court.
The Federal Bankruptcy Code imposes an “automatic stay” upon any other pending judicial proceeding. This provision, for example, prevents a creditor from suing to collect their debt while the debtor is in the bankruptcy proceeding. It also specifically stays the allocation or distribution of property or assets in a divorce case until the bankruptcy is completed. Clearly, the automatic stay can have a severe impact on divorce proceedings. The automatic stay does not not stay the imposition or collection of alimony or child support, the issues of child custody or the dissolution of the marriage itself. These issues may be decided by the State Court but no assets can be distributed without the permission of the Bankruptcy court..
A bankruptcy allows the debtor to discharge certain liabilities. Alimony and child support obligations are not dischargeable in bankruptcy and will remain an obligation of the debtor.
Significant problems can also arise if parties continue in joint ownership of property or remain jointly liable for debts after the divorce.
At a time when bankruptcy filings have reached unprecedented numbers, care should be taken in drafting the terms of the divorce settlement so that the terms comply with the law and meet the expectations of both parties
