Unfortunately, money problems and problems at home often go together. Couples who are having financial difficulties are under a lot of stress, and this can cause marital problems. And couples who divorce often find out that, although two can’t live together quite as cheaply as one, setting up separate households can be very expensive. How does bankruptcy affect divorce and how does divorce affect bankruptcy?
One issue to think about is whether the debts that arise in the divorce are dischargeable in bankruptcy. Or course, the main reason most people file bankruptcy is to eliminate their debts through the bankruptcy discharge. Most debts are dischargeable, but some kinds of debts are not dischargeable. In a Chapter 7, this includes any kind of debt owed to your ex-spouse, if it was provided for in the divorce settlement of judgment. Any debt you owe your ex-spouse, whether it is child support, maintenance, or part of a property settlement, is not discharged in bankruptcy. This is a strict rule and very simple.
In a Chapter 13 repayment plan, some divorce-related debts may be dischargeable. Here there is a difference between domestic support payments, including child support and maintenance, and debts related to a property settlement. If you owe a domestic support debt to a child or ex-spouse, you must pay it in full in a Chapter 13 plan. However, if the debt is based on a property settlement, you can pay less than the full amount due, depending on factors like your income and the value of your property. If you are involved in a divorce and your are facing financial problems, it would be a good idea to consult with both a divorce lawyer and a bankruptcy lawyer to plan your financial future. On the other hand, if you think your spouse may be heading for financial problems after the divorce, it’s also a good idea to consult with a bankruptcy lawyer to do your best to protect yourself and any claims you have to payment from your ex-spouse.
What about legal fees? Even routine divorce cases usually require skilled attorneys to navigate court proceedings and reach a practical settlement; and there are legal fees that result. If you have been ordered to pay your ex-spouse’s legal fees, it is likely that you may not be able to discharge those legal fees. This is a technical issue with plenty of uncertainty, so you need a capable and experienced bankruptcy lawyer to advise you. There are steps you can take in your divorce to make it less likely that any fees you have to pay to your ex-spouse’s lawyer will be excluded from the bankruptcy discharge. If you are the party whose legal fees are being paid by your ex-spouse, you should consult with a bankruptcy lawyer to do what you can to make those fees not dischargeable.
Your own lawyer’s fees are most likely dischargeable in a bankruptcy, as long as you are honest and truthful with your lawyer and don’t make false promises of payment.
After the divorce, are you finished with financial issues involving your ex-spouse? Maybe not. In every Chapter 7 bankruptcy, there is a trustee whose job it is to find property that can be turned into cash to pay the debtor’s debts. A trustee can go after payments that the debtor has made to creditors or to others, including family members. It’s no surprise to learn that, if a debtor transfers a valuable asset, like a car, for a very low price, intending to put the car out of the reach of a trustee, state law and federal bankruptcy law allow the trustee to reverse the transfer and get the property, or the value of the property, back from the recipient. This is true for some transfers, even if the debtor did not intend to hide assets or defraud anybody. This can be true even if the transfer was part of a settlement that the parties negotiated. What does this mean? It means that a trustee can review your divorce settlement and, if the trustee can convince the bankruptcy court that the settlement was completely unfair, the bankruptcy court can undo the settlement and put the property back in the original ownership, with the trustee taking over the debtor’s share. If you are recently divorced and your ex-spouse files bankrutpcy, you should consult with an experienced bankruptcy lawyer to discuss all the twists and turns and entanglements between divorce and bankruptcy.