The Surprising Benefits: Chapter 13 Potentially Discharges Divorce Property Settlement Debts

Chapter 13 can write off some or all of the non-support debts included in your divorce. But it comes with some potential disadvantages. 


Last week we explained how Chapter 7 cannot write off non-support divorce debts, but Chapter 13 can. We said if you owe a significant debt created by your divorce decree (for other than child or spousal support) you should talk with a bankruptcy lawyer. Don’t necessarily think that Chapter 13 is your best option with this kind of debt. Chapter 13 has advantages and disadvantages. We get into these now so you can start to see which option is best for you.

Non-Support Divorce Debts

Support debts are not discharged (written off) under either Chapter 7 or 13. Only non-support debts can be discharged under Chapter 13 (and not Chapter 7). So we need a quick, practical reminder what we mean by non-support debts.

We said last week:

Most non-support debts are those obligations in your divorce decree related to the division of property and the division of debts between you and your ex-spouse.

The Division of Property

… often in a divorce one ex-spouse receives less assets than the other. For example, you may receive a vehicle worth much more than your ex-spouse. Or you may get the family home. So you’re required to pay your ex-spouse half of the equity in the home to make up the difference. Whatever specific amount you’re required to pay in these kinds of situations is a non-support divorce debt.

The Division of Debts

Also, for whatever reason your divorce decree may have required you to pay a debt arising from the marriage. This debt may be a jointly-owed one, one that you owe individually, or even one that only your ex-spouse owes. The decree orders that your ex-spouse no longer has to pay that marital debt. You have to pay it by yourself.

… . This obligation by you to your ex-spouse to pay the debt is a non-support divorce debt.

Disadvantages of Chapter 13

The main advantage of Chapter 13 for this kind of debt is that you could avoid paying most or even all of it. Also, Chapter 13 has many other potential advantages over Chapter 7, some of which may well apply to your situation. These are beyond the scope of today’s blog post.

Let’s focus instead on three main potential disadvantages of Chapter 13 for this kind of debt. These are: 1) delay in discharge, 2) risk of no discharge, and 3) likely partial payment of the nonsupport divorce debt.

Delay in Discharge

A Chapter 13 case takes a lot, lot longer than a Chapter 7 one. It takes years instead of months. That is, a Chapter 13 case usually doesn’t finish for 3 full years, and often goes as long as 5 years. Contrast that with a Chapter 7 case, which usually takes less than 4 months from filing date until completion.

And you don’t get a discharge of your debts—including the non-support divorce debt(s)—until the end of the case.  Again, that’s 3 to 5 years.

Usually your ex-spouse can’t do anything to collect on that debt in the meantime. So the delay may not be much of a practical problem. But you’re still living in a sort of limbo in the meantime.

If you have other reasons to be in a Chapter 13 case the delay may well be worthwhile. Or if the amount of you non-support divorce debt is very large that alone may make the delay worthwhile. Just be aware of this downside.

Risk of No Discharge

Almost all Chapter 7 cases, especially those in which the person is represented by a lawyer, get successfully completed. But Chapter 13s are riskier. That’s because they involve a monthly payment plan that you and your lawyer put together, it gets court-approved, and then you pay on it for 3-to-5 years. In the right situations a Chapter 13 case can accomplish much more than Chapter 7. But there are more things that can go wrong.

As we said above, you don’t get the discharge of debts until the end of the case. So you have to get to the end successfully to discharge the non-support divorce debt. There’s a risk that you would not get to the discharge.           

Likely Partial Payment of the Non-Support Divorce Debt

The Chapter 13 payment plan referred to above very seldom results in all debts being paid in full. In fact, in some cases you’d pay certain debts nothing before they get permanently discharged. In the majority of cases a non-support divorce debt would get paid in part, but often only a small percentage.

Non-support debts would be treated like all your other “general unsecured” debts. These are all debts that are not secured by collateral and are not “priority” debts (such as recent income taxes) which must be paid in full. All of your “general unsecured” debts are put together into a single pool of debt. The extent to which you’d pay that pool of debt would be based on a bunch of factors, such as:

  • how much you can afford to pay all your creditors per month throughout the length of the case
  • the length of your Chapter 13 plan, generally 3 years or 5, determined by your income
  • the amount of your priority debts, which you paid in full before the “general unsecured” debts get paid anything
  • how much your plan must pay in administrative expenses—the Chapter 13 trustee fees and the attorney fees you did not pay before your case was filed—all paid before paying any of the “general unsecured” debts

As a result sometimes the “general unsecured debts, including your non-support divorce debts, get paid nothing at all. All of your available money is exhausted elsewhere. (This assumes your local bankruptcy court allows such “0% plans”). On the other hand, in rare cases the “general unsecured” debts get paid in full. This is more common when you have little or no priority debts and the general unsecured debts are relatively small. Most of the time your non-support divorce debts get paid a relatively small portion of the total you owe. It depends on all these factors.

 

The Surprising Benefits: Discharge Divorce Property Settlement Debts

Chapter 13 enables you to discharge—legally write off—some or all of any non-support debts included in your divorce. Chapter 7 does not do this.

                               

“Discharging” a Debt or Legal Obligation

When you successfully complete a consumer bankruptcy, you get a discharge of some or all of your debts. When a debt is discharged the creditor is legally forbidden to take any action “to collect, recover or offset any such debt.” See Section 524 (a)(2) of the Bankruptcy Code. The debt has become legally uncollectible. So, one of your main goals in bankruptcy is to discharge all your debts, or as many debts as the law allows.

Chapter 7 vs. Chapter 13 Discharge

Chapter 7 “straight bankruptcy” discharges most debts. But there are exceptions.

Some debts you may want to continue paying and don’t want to discharge. One reason may be because you want to keep the collateral securing that debt. So, for example, you might legally agree to continue paying your vehicle loan in order to keep that vehicle.

Certain other debts the law does not allow to be discharged. Examples include child and spousal support, many student loans, and recent income taxes.

The kinds of debts that a Chapter 13 case does not discharge are mostly the same kinds as under Chapter 7.  These include the kinds mentioned above. You can voluntarily pay a vehicle loan under a Chapter 13 “adjustment of debts” case. (Plus you may well get some extra advantages).  And Chapter 13 does not discharge child and spousal support, many student loans, and recent income taxes. (Again, you may well get some major advantages under Chapter 13 in dealing with these special debts.)

However, there IS a significant kind of debt which Chapter 7 does not discharge but Chapter 13 does. These are non-support divorce debts. As a result you should consider Chapter 13 instead of Chapter 7 if you have this kind of debt. This is especially true if you owe a significant amount of non-support divorce debt. Chapter 13 would likely enable you to pay little or even none of your non-support divorce debts. If you either didn’t file bankruptcy or filed under Chapter 7 you’d be required to pay them in full.

What Are Non-Support Divorce Debts?

What we’re calling divorce debts are those financial legal obligations that arose out of your marital divorce. These can also come through separation decrees and other family court proceedings.

Non-support divorce debts are simply divorce debts not involving the payment of spousal or child support.

Most non-support debts are those obligations in your divorce decree related to the division of property and the division of debts between you and your ex-spouse.

The Division of Property

Your divorce decree may divide the marital assets in a very straightforward way. At the end of the divorce both of you could be in possession of what you’ve been awarded—all done.

But often in a divorce one ex-spouse receives less assets than the other. For example, you may receive a vehicle worth much more than your ex-spouse. Or you may get the family home. So you’re required to pay your ex-spouse half of the equity in the home to make up the difference. Whatever specific amount you’re required to pay in these kinds of situations is a non-support marital debt.

The Division of Debts

Also, for whatever reason your divorce decree may have required you to pay a debt arising from the marriage. This debt may be a jointly-owed one, one that you owe individually, or even one that only your ex-spouse owes. The decree orders that your ex-spouse no longer has to pay that marital debt. You have to pay it by yourself.

This provision in the decree creates a new and separate obligation by you to your ex-spouse to pay that debt. This is over and beyond whatever obligation you may have had (or not had) already directly to the creditor.

This obligation to your ex-spouse to pay the debt is a non-support marital debt.

Discharged Only Under Chapter 13

Chapter 7 case simply does not discharge these non-support debts.

You’d continue to owe any obligation to pay your ex-spouse money for division of marital property. You would continue to owe any obligation stated in the divorce decree to pay a marital debt. This would be true even if you could discharge the debt to the direct creditor.

However, both division-of-property and division-of-debts obligations to your ex-spouse (and any other non-support divorce debts) could be discharged in a Chapter 13 case. So, again, if you owe non-support divorce debts you should look into Chapter 13 with your bankruptcy lawyer.

But Chapter 13 isn’t necessarily your best option if you have a non-support divorce debt. Chapter 13 has disadvantages, both of itself and in how it treats non-support obligations in particular. We’ll get into these next week. Then you’ll begin to see whether Chapter 13 really is the better solution for you.

 

The Impact of One Spouse’s Bankruptcy Filing on a Divorce Proceeding

One spouse’s bankruptcy filing may briefly slow down but will not likely stop an ongoing divorce case.  

 

The “Automatic Stay” and Divorce

When you file a bankruptcy case, that filing immediately puts the “automatic stay” into effect. This can be one of the most immediate and important benefits of filing bankruptcy. The “automatic stay” stops most collection actions against you as of the moment you file.

One way the “automatic stay” stops creditors is by stopping lawsuits and other legal proceedings against you. In the words of the statute, it specifically stops “the commencement or continuation… of a judicial, administrative, or other action or proceeding against the debtor…  .” See Section 362(a)(1) of the U.S. Bankruptcy Code. If a creditor had sued you before you filed bankruptcy, generally that lawsuit or legal proceeding would be immediately stopped.

So, what if that lawsuit or proceeding was divorce proceeding between you and your spouse? Would your bankruptcy filing and its “automatic stay” put an immediate stop to that divorce proceeding?

Mostly it would not. That’s because the “automatic stay” has a number of exceptions, a number of which pertain directly to divorce.

The Dissolution of the Marriage Itself

The Bankruptcy Code specifically says that the bankruptcy filing “does not operate as a stay… of the commencement or continuation of a civil action or proceeding… for the dissolution of marriage, except to the extent that such a proceeding seeks to determine the division of property… .”  Section 362(b)(2)(A)(iv).

That is, the termination of the marriage itself is not affected by your bankruptcy filing. So filing bankruptcy will not stop or significantly slow down the ending of your marriage.

The Division of Property and Debts

But the part of the divorce proceeding about division of property IS “stayed” by your bankruptcy filing. And division of property includes the division of both assets and debts. This means that, until the bankruptcy court allows it, the divorce court can’t determine which spouse gets what assets and has to pay what debts.

This “stay” makes sense because you have two courts dealing with overlapping issues—the couple’s debts and assets. So the two courts would be both dealing with shifting facts if both cases moved ahead at the same time.

So, what if your spouse’s lawyer asks the bankruptcy court for permission to proceed with the divorce as to the marital property and debts? Whether the bankruptcy judge will give that permission will probably depend very much on the facts of the case. Often bankruptcy judges are quite willing to send divorce matters back to the divorce judge.

Other Divorce and Family Law Issues

There are other exceptions to the “automatic stay” which allow certain other aspects of divorce proceedings to continue:

  • the establishment of child and spousal support
  • child custody and visitation issues
  • the establishment of paternity
  • matters of domestic violence
  • most collection of child and spousal support, including the withholding or garnishment of a debtor’s paycheck or bank account; suspending a driver’s, occupational, professional, or recreational license to coerce payment; and intercepting a tax refund  

See Section 362(b)(2) of the Bankruptcy Code.

Conclusion

A bankruptcy filing by one spouse does not stop most of their divorce proceeding from continuing. And the part that it does stop—the division of property—would often just result in a temporary delay.

 

Escaping a Chapter 13 Case Filed Jointly with Your Spouse

If you filed a Chapter 13 adjustment of debts case jointly with your spouse but are now considering divorce, how do you get out of the case? 

 

When a Chapter 13 Case Outlasts a Marriage

A Chapter 13 “adjustment of debts” case usually lasts three to five years. A lot can happen in that time. If you filed the case jointly with your spouse you might end up getting divorced before the case is finished.

There are rare exceptions but continuing the case without any change will almost never make sense. Among other reasons, your Chapter 13 case is built around your monthly expenses, which will almost certainly change. More basic, your case was built around common goals, which will presumably change with a divorce.

Most likely one or both of you will need to get out of your Chapter 13 case. What are the ways that you can do this?

Dismissal

You can almost always get out of a Chapter 13 case simply by having your lawyer dismiss it. A dismissal is a voluntary ending of the jointly filed case.

In contrast, a Chapter 7 “straight bankruptcy” can be harder to dismiss. Why are Chapter 13s easier to dismiss?

It’s likely because bankruptcy law recognizes that committing to a 3-to-5-year Chapter 13 case is a big deal. To encourage you to make the commitment, the law allows you to freely leave it if you want to later. You’re more likely to do it if you know from the beginning that you’re not legally bound to finish it. 

So if you and your spouse are now on the brink of divorce, you can file a simple motion to dismiss your case. In most cases it is granted quickly.

After dismissal, each spouse/ex-spouse can decide what is then best for him or her—a new individual Chapter 13 case, a Chapter 7 one, or neither.

Conversion to Chapter 7

Your joint Chapter 13 case can also be converted into a joint Chapter 7 case.  A converted Chapter 7 case usually takes about 3 or 4 months to finish. It may be a good way to clean up some financial matters before you go ahead with the divorce.

Besides this timing advantage, converting from Chapter 13 to 7 makes sense if the purpose you filed under Chapter 13 no longer applies. For example, you may have wanted to save the family home from foreclosure, but if you are getting divorced that may be both less important and less financially feasible. Converting the case into a Chapter 7 one results in a discharge (legal write-off) of most or all your debts. That does not happen when you merely dismiss a Chapter 13 case.

Severing a Chapter 13 Case into Two Separate Cases

Your joint Chapter 13 case can be “severed” into two separate Chapter 13 ones. The bankruptcy court routinely allows this, including if the spouses are getting divorced.

Once the case is severed into two, each person can then independently do whatever is in that person’s best interest.

One or the other person (or both) may have a good reason to continue under Chapter 13. For example, her car may be being paid through a favorable cramdown. Or her personal income taxes may be being paid through the plan without additional interest, penalties, or threat of collections by the IRS or the state. So that person could file a new amended Chapter 13 plan with such benefits while incorporating the changed financial circumstances.

One or the other person (or both) may instead convert his or her case into a Chapter 7 one.  That person would do that if there’s no more reason for that person to be in a Chapter 13 case.

Either person can also, after the case is severed into two, dismiss his or her case while the other continues in bankruptcy. A dismissal results in no discharge of debts. That’s because a discharge does not occur under Chapter 13 until a successful completion of a case. So a dismissal seldom makes sense without being followed by a new Chapter 7 or 13 case.

Conflict of Interest and Client Secrets Issues

Lawyers are ethically not allowed to represent two people at the same time who have interests that are in conflict with each other. Nor can they simultaneously represent two people who will likely share secrets or confidences with the attorney that need to be kept from the other person.

When two spouses are seriously considering divorce, their interests usually diverge. And each spouse will likely tell the lawyer things this spouse doesn’t want the other spouse to hear.

So at some point the lawyer representing the spouses in a jointly filed Chapter 13 case can’t represent them both. At that point, the spouses have to get separate lawyers. They have to get independent legal advice and legal representation about how to make the choices discussed above.

 

Considerations about Filing Bankruptcy After Your Divorce If You’ve Filed Before

Think about these special considerations if you filed bankruptcy before your divorce and now need to think about filing another one. 

 

In the last blog post we introduced three very practical considerations about filing bankruptcy again if you and your ex-spouse filed a bankruptcy in the past before your divorce. We now look at these three more closely.

1) Were You Definitely a Debtor In the Earlier Bankruptcy Case?

If your ex-spouse filed that earlier bankruptcy without you, then you can now file bankruptcy whenever you want. The delay-in-filing-again rules don’t apply to you.

So could you possibly have thought that were on that prior bankruptcy case with your ex-spouse, but you really weren’t?

Consider all the financial and other huge stresses at the time of your prior bankruptcy filing. It wouldn’t be that surprising if a few years later you wouldn’t remember exactly what happened. The two of you might have gone to the initial meeting together but only your ex-spouse followed through. Maybe you ended up not signing the documents. Or maybe you both signed the documents but then for some reason only your ex-spouse was included in the filing. Maybe your ex-spouse was the person who needed the bankruptcy and so you were dropped.  

Not remembering who actually filed bankruptcy would apply all the more so in a marriage that later ended in divorce. At the time of that earlier bankruptcy you may not have been communicating well with your then-spouse. He or she may have even intentionally misled you.

So, find if you really were a debtor in the earlier case. Talk with your current bankruptcy lawyer about this at the beginning of your initial consultation with him or her.

2) Was a Discharge Granted in that Earlier Bankruptcy Case?

Even if you were definitely a debtor in that earlier case, these timing rules only apply if that case—whether a Chapter 7 or Chapter 13—resulted in a successful discharge (legal write-off) of your debts at the completion of that case. If there was no discharge, then you could file a new bankruptcy case as soon as you want.

So you need to make sure that the previously filed bankruptcy case did indeed result in a discharge.

Most likely there was a discharge of debts if you remember that the case was completed successfully. At the end of your case you should have received an order from the bankruptcy court granting the discharge. This would be about 3-4 months after filing under Chapter 7, or 3 to 5 years after filing under Chapter 13.

But it’s not that unusual to think you had completed a case successfully when actually there was no discharge

Chapter 7 “straight bankruptcy” cases have a relatively high success ratio. Nevertheless, just one even minor-seeming slip-up could result in a case getting “dismissed”—thrown out—instead of “discharged.” You might not realize this because you didn’t read the document carefully enough. Or you didn’t read it at all because you thought your spouse did.

Chapter 13 “adjustment of debts” often don’t make it all the way to completion and discharge. Just because a Chapter 13 case has lasted for years, it can still very easily be “dismissed” instead of “discharged.” Your ex-spouse may not have understood, or may not have bothered to tell you.

So, if you still have your old bankruptcy documents, see if you can find the discharge order. Bring it and whatever other papers you have to your initial consultation meeting with your current bankruptcy lawyer. Even if you don’t have any such documents, your lawyer can likely still find out whether you got a discharge.

3) Do You Definitely Need A “Discharge” in a New Bankruptcy Case?

Even if you did file that prior case with your ex-spouse, AND a discharge was definitely entered, you may STILL want to consider whether to file a Chapter 13 “adjustment of debts” case now, even if the applicable time period has not yet expired,.

You can’t do so, you figure, because the time had not yet expired! Well, you actually CAN file a new bankruptcy case at any time. You just can’t get a discharge of debts in that new case.

But why would you file a bankruptcy case knowing that it would not result in a discharge of debts? Isn’t that the reason for filing bankruptcy?

Usually, but not always.

True, the discharge of debts is usually the main benefit of a Chapter 7 “straight bankruptcy”.

However, a Chapter 13 case can provide benefits that sometimes can be more important than the discharge of debts. In fact, sometimes there aren’t even any debts that need to be discharged—especially if the earlier bankruptcy was completed not so long ago and the debts discharged then. Instead, the primary reason you would seriously consider filing a Chapter 13 case is if you owe some special debts—usually ones that you can’t or don’t want to discharge—and you need help with them.

Chapter 13 can usually buy you very valuable time to pay debts that you can’t or don’t want to discharge. You get time to pay them, and protection from your creditors in the meantime.

These special debts included debts secured by collateral you want to keep, such as home mortgages and property taxes, and other liens on your home, and vehicle loans. Other such debts are income taxes and child/spousal support.

Chapter 13 gives you a lot of power over these tough debts, even without the usual discharge of debts. So it may not matter when you filed your prior case with your ex-spouse. Even if you can’t file a new case yet and get a new discharge, you may benefit from filing a Chapter 13 case now without getting a discharge of debts from it.

 

Effect of Divorce on Filing Bankruptcy Again

The timing rules don’t change if you filed bankruptcy before your divorce and now need a new one. But there ARE some important twists.

 

Divorce is often financially devastating. So, even if you and your ex-spouse filed bankruptcy earlier, before the divorce, you may need to seriously consider filing bankruptcy again at some point after the divorce.

There are some detailed but clear rules about when you can file a bankruptcy after going through one earlier. Today we’ll cover those rules briefly. Then we’ll finish with some special considerations that apply when there’s been an intervening divorce.

The Basic Rules Still Apply

To be clear, an intervening divorce does NOT directly affect the rules about when you can file a new bankruptcy case. If you and your ex-spouse filed a joint bankruptcy case in the past, for timing purposes that’s the same as if you would have filed by yourself. That’s true regardless if that bankruptcy was filed mostly because of the other spouse’s debts. It’s true even if you didn’t want to be involved, or if you felt you were barely involved. As long as you were on the bankruptcy documents and signed them, you filed bankruptcy.

The timing of a second bankruptcy case turns on two simple factors:

  • what kind of case—Chapter 7, 11, 12, or 13—you filed earlier, and
  • what kind of case you intend to file now.

Your marital status—before, during, after—has no effect.

The Timing Rules

If you now want to file a Chapter 7 “straight bankruptcy” case—

  • If the earlier case was a Chapter 7 or 11 one, you have to wait 8 years from the filing date of the earlier case to the filing date of the new case.
  • If the earlier case was a Chapter 13 one, you have to wait 6 years from the filing date of the earlier case to the filing date of the new case.

  If you now, after the divorce, want to file a Chapter 13 “adjustment of debts” case–

  • If the earlier case was a Chapter 7, 11, or 12 one, you have to wait 4 years from the filing date of the earlier case to the filing date of the new case.
  • If the earlier case was a Chapter 13 one, you have to wait 2 years from the filing date of the earlier case to the filing date of the new case.

So, generally, you just look to see what Chapter case you filed earlier, and when that was filed. Then you know whether you need to wait 2, 4, 6, or 8 years to file the next case, depending on the Chapter of the new case.

But there are some other potentially game-changing considerations that in a practical sense especially apply to divorces

Special Post-Divorce Considerations

Think about the following three questions:

  • Did YOU actually file that earlier bankruptcy case? As mentioned above, you DID if you were on the bankruptcy petition and signed the documents that then got filed. But was the case actually filed? And when it was filed is there any possibility that only your ex-spouse was on the documents then? The above 2, 4, 6, and 8-year rules only apply to YOU if you were formally a debtor in that prior case. Not so if your ex-spouse filed that case without you. If that happened you can file a new bankruptcy case whenever you want.
  • Was a “discharge” of debts granted to the debtors in that earlier bankruptcy case? The timing rules only apply if that earlier case was actually completed successfully, resulting in a discharge of your debts. You might possibly think that the case was completed successfully and a discharge was entered, and yet be mistaken. This could happen if your ex-spouse was more involved in the case than you were. You may not have closely tracked how the case was completed. You may not have been in close contact with your bankruptcy lawyer. Of if you didn’t have a lawyer you may not have understood what happened. It is not unusual—especially in cases without a lawyer—for some relatively simple step to be missed and for the case to be “dismissed”—thrown out—without a discharge of debts. If that happened in your case, you can file your new bankruptcy whenever you want.
  • Do you definitely need a “discharge” in a new bankruptcy case? Sometimes you don’t. If not, you can file a Chapter 13 case without waiting ANY length of time you’re your prior case. You sometimes don’t need a discharge of debts so much as protection from creditors. Chapter 13 can often give you extended protection from certain important debts. For example, Chapter 13 deals well with secured and “priority” debts, such as your home mortgage(s), property and income taxes, child and spousal support obligations, home owner association dues, and student loans. You can get years of protection from these types of creditors. Usually that comes with the opportunity to pay these kinds of debts over time based on your ability to pay. You get this by filing a Chapter 13 case whenever you want, no matter when an earlier case was filed and completed.

In our next blog post we’ll expand on these three important post-divorce considerations.

 

Conditions When Divorcing Spouses Should Consider Filing a Chapter 7 Together

Rarely should a couple consider filing bankruptcy together. It takes a combination of circumstances, and independent legal advice, to do so.   

Last time we talked about filing a joint Chapter 7 case with your soon-to-be ex-spouse if that is in each of your self-interest. That means, for each of you, it’s in your best interest to file:

  1. a Chapter 7 case
  2. jointly
  3. at the same point in time
  4. before the divorce case instead of after

 Let’s look at these one at a time.

1. Chapter 7 Is Best for Both

Whether or not to file bankruptcy is a big decision.

Then, deciding between Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” is a big decision. (Or, rarely, Chapter 11 if you own a larger business or have an unusually huge amount of debts. Or Chapter 12 if you own a farming or fishing business.)

For each spouse Chapter 7 must be the best option for him or her.

There are situations in which only one person needs to file bankruptcy. One person may be the only one liable on all the debts, or on all the troublesome debts. The other person may not need debt relief. Then, joining in the Chapter 7 case may be detrimental to him or her.

There are situations in which both needs bankruptcy but one needs Chapter 7 and the other Chapter 13 relief.

However, sometimes both spouses need bankruptcy relief and both need a Chapter 7 case. This is in fact a common situation. Most of the time both spouses are jointly liable on most of the debts, or enough of them that both need relief.

Chapter 7 is often the better tool for both of them. Chapter 13 is generally a longer term solution. A couple contemplating divorce more likely needs an immediate solution—clean up their finances, get divorced, and move on with life.  

2. Filing Jointly Is Best for Both

The advantages of filing jointly are cost and convenience.

You pay one set of bankruptcy court filing fees and attorney fees instead of two. The court filing fee is the same for individual and joint cases. And attorneys usually does not charge more, or only a little more, for a joint case. So essentially it costs half as much to file a joint case than two separate ones. When money is extremely tight, that sensibly makes filing jointly attractive.

The convenience is in saving time by going through one case instead of two (assuming both are filing). If the spouses continue to be in a reasonably calm and cooperating relationship, they can help each other find a good bankruptcy lawyer, work with him or her in preparing the documents, attending the “meeting of creditors,” and do whatever is needed to complete their case successfully.

But these same hoped-for advantages could easily turn into disadvantages.

First, if the two spouses begin not cooperating well with each other, a joint filing could be much less convenient. The uncooperative spouse could slow the whole process down, sometimes to the significant detriment of the other. The documents could be inaccurately completed, potentially jeopardizing the entire case.

Second, the lack of good communication between the spouses could add to the cost. If any debts are not originally included in the original documents, adding them later costs more money. There are various other adjustment like this that could increase the cost, reducing the cost advantage to filing jointly.

3. Both Need to File Bankruptcy at the Same Time

Often the timing of the filing of a Chapter 7 case is very important.  It affects what debts and assets are included and what happens to them, among many other things.

One spouse may benefit from filing the case at one point in time, the other from filing some other time. The benefit of each person being able to file when it’s best for that person may be reason enough not to file jointly.  

4. Filing Before Divorce Best for Both

Sometimes one spouse would benefit from filing bankruptcy before divorce, while the other would benefit from filing after.  This is usually because of the shift in assets and/or debts that happens during the divorce. But it can be because of many other reasons. The person who would benefit from filing bankruptcy after the divorce obviously shouldn’t be filing a joint bankruptcy beforehand.

Spouses MUST Get Separate Advise from Separate Lawyers

There is only one way to find out the answers to the above four issues. You each need to get advice about whether bankruptcy is in your best interest, whether Chapter 7 is the best option, when is the best time to file, and whether filing before or after the divorce is better for you. And that advice should be from separate lawyers representing each of you independently

Lawyers are ethically not allowed to represent two parties who have a legal conflict of interest. Any two spouses often have legal conflicts of interest. That’s much more likely if they’re on the way to getting divorced.

Lawyers also have an obligation to preserve clients’ confidences, and to advocate on behalf of their clients. There is a serious doubt whether a single lawyer could fulfill these obligations with spouses intending to divorce.

Cut through all these problems by getting independent legal advice about each of your options. Then, if you end up in agreement on the above four issues, it may make sense to file Chapter 7 together.

 

Can and Should Divorcing Spouses File a Chapter 7 Together?

Under bankruptcy law they CAN file a joint bankruptcy. But often it’s not such a good idea. Sometimes it’s a very bad idea.  

 

CAN File a Joint Bankruptcy Case Together

A “joint case” is one filed “by an individual… and such individual’s spouse.” “Spouse” is not defined in the Bankruptcy Code, but presumably refers to someone who is legally married to the “individual.”

So, if you and your spouse are contemplating divorce, you CAN file a Chapter 7 “straight bankruptcy” jointly.

But SHOULD You File Together?

As you think about whether you should file jointly, consider some timing considerations. Think about whether it makes sense to file the divorce case first, before filing the bankruptcy case. Or the other way around.

If it makes sense to file divorce first, when that’s done you’ll presumably no longer be married. Since you would no longer be spouses, you would not be able to file bankruptcy jointly.

So what are the considerations about which to file first?

Debts as of the Date of Filing Bankruptcy

One very important consideration is that a bankruptcy case affects only debts that exist when you file that case. (Section 727(b) of  the Bankruptcy Code.)  Future debts aren’t included.

This means that filing a bankruptcy case before going through divorce will not affect the obligations created in that divorce.

Many debts arising out of divorce aren’t affected by bankruptcy, but some can be. So sometimes it makes sense to hold off on filing bankruptcy until after the divorce. At that point you could only file without your now-former spouse.

Assets as of the Date of Filing Bankruptcy

Same thing regarding things you own—your assets. Usually the only assets involved in your bankruptcy case are those you own “as of the commencement of the case.” (Section 541(a)(1) and (2).) So assets that you acquire after you file your Chapter 7 case are not part of the case.

Divorce usually involves a division of assets between the spouses. You may lose some assets to your spouse through divorce, you may gain some. This anticipated shifting of assets may affect when you file a Chapter 7 case. If are expecting to gain assets in your divorce that may not be protected (“exempt”) in bankruptcy, that may encourage you to file bankruptcy before the divorce. If divorce is going to take away unprotected assets, it may make sense to file divorce first.

So When SHOULD Spouses Considering Divorce File a Joint Bankruptcy?

Arguably, an about-to-divorce couple should never file a joint bankruptcy. Why not?

First, the two spouses can file individual bankruptcies at any time. They are not obligated to file jointly. It often makes a lot of sense to file separately, and since you’re allow to maybe you should.

Second, if you are seriously thinking about divorce, the odds are high that you and your spouse’s legal interests are diverging. There is a good chance that the legal solution best for you is not the best for your spouse. You can’t be on the same team if your goals are different.

Third, your interests are often in direct conflict. You certainly can’t be on the same team if your goal is to defeat your teammate.

Fourth, being on the same side in a Chapter 7 case assumes a level of honesty, trust, and cooperation that seldom exists between ready-to-divorce couple.

Should You EVER File Chapter 7 Case Together?

You might still file a joint Chapter 7 case if doing so is in each of your self-interest’s. That means it’s in the best interest of each of you to file:

  • a Chapter 7 case
  • that Chapter 7 case jointly
  • at the same point in time
  • before starting the divorce case

 Let’s look at these in our next blog post.

 

Divorce and Bankruptcy Q&As

Here are straight answers to some of the most important questions about bankruptcy dealing with divorce.


Q: If you and your spouse are considering getting divorced, can you both still file a bankruptcy together? 

A: Yes, any couple who are legally married you can file a joint bankruptcy—a single case filed together. But whether you should do so is not so simple. Sometimes it’s a smart step. For example, it may be a sensible way to clear away your debts before the divorce. But other times it could be a big disaster, because of personal conflicts and the legal conflicts of interest involved.  

Before making any decisions along these lines, as impractical as it may seem, you and your soon-to-be ex-spouse should EACH get thorough advice from different lawyers about whether filing together is in BOTH of your best interests.

Q: If you are still legally married, can ONE of the spouses file bankruptcy alone before the divorce. Can one of them do so without the other’s cooperation? Or can there be an agreement that one of the two files bankruptcy to clear away marital debt when most of the debt is in one spouse’s name?

A: Either spouse can file bankruptcy alone even if they are married. That one person can do so independently or as part of an agreement between them.

If your intention is to clear away all or most of the marital debt because it is solely in that person’s name, be extremely careful about making that assumption. The non-filing spouse may well be legally liable on many more debts than he or she expected. Just because you think a debt is only in one person’s name that may not be legally accurate. This is especially true in community property states, but can be everywhere.

Again, never make this decision without both spouses getting independent legal advice about it. This means each of you discussing your own situation with your separate lawyer looking out for your separate, individual interests.  Do this even if both spouses are being honest and fair with each other; all the more so if there is any chance they are not.

Q: What if you and your spouse have already filed a joint bankruptcy case within the last few years? If you are now get a divorce, will that affect when either of you can file a new bankruptcy case?

A: No. The rules about filing a new bankruptcy case after having filed a previous one turns merely on what kind of case—Chapter 7, 11, 12, or 13—you filed earlier, and what kind of case you intend to file now. The fact that the prior case was filed jointly does not affect when you can file individually. Find out from a competent bankruptcy lawyer when you will be able to do so.

Two cautions about this. First, verify that you both were legally named as a debtor in the previous case. Second, the previous case must have resulted in a discharge (legal write-off) of your debts. Essentially you must have completed the case successfully, or else you don’t have to wait any period of time. Most likely you will know whether you were legally named as a debt and whether you got a debt discharge. But people can make mistakes about these, which can totally change what you can do. So be sure to verify these both with your lawyer.

Q: If you and your spouse are now in an ongoing Chapter 13 “adjustment of debts” case, can you both, or can just one of you, get out of it?

A: Yes, there are various ways that one or both of you can get out of your joint Chapter 13 case.

The entire case can almost always simply be dismissed, for any sensible reason. But that leaves all or most of the debts still owed. So from there each person can then decide what is best for him or her. That might be a new Chapter 13 case, or instead Chapter 7 “straight bankruptcy” case. Or in rare cases one or the other person no longer needs bankruptcy relief.

Or your joint Chapter case can be converted into a joint Chapter 7 case. With an upcoming divorce the original purpose of the Chapter 13 case may have ended. The joint Chapter 7 case would likely get your bankruptcy over with quickly and still get you a discharge of most if not all of your debts.

Or your joint Chapter 13 case can be “severed” into two separate Chapter 13 ones. Then each of you could independently do whatever you want to do with your new separate case. For example, you could amend your own case to address your own new circumstances, convert it into a Chapter 7 case, or dismiss it altogether.

Q: What happens if one of you files a separate bankruptcy case after the divorce case has been filed in court?

A: Some parts of the divorce case would be stopped by the bankruptcy filing, at least temporarily. That’s because of the “automatic stay” imposed by the bankruptcy filing that stops the collection of most debts. But other parts of the divorce case could continue on unaffected.

Specifically, the parts that would continue are determinations about child and spousal support, the enforcement of ongoing support, matters involving child custody visitation, paternity, and domestic violence, as well as the actual dissolution of the marriage other than the division of property and debts. It’s that crucial part of divorce involving the division of property/debts that would be “stayed” by the bankruptcy filing.

 

Our next few blogs will get more into these and related issues.

 

Can You Ever Write Off Child or Spousal Support in Bankruptcy?

You might have heard that you can’t “discharge”—legally write off—child support or spousal support. So can Chapter 7 or 13 ever help?

 

Support is Not Dischargeable, IF It’s Really Support

If you owe a debt “in the nature of” child or spousal support, that debt cannot be discharged (legally written-off) in either a Chapter 7 or Chapter 13 case.

The point of the “in the nature of” language is that an obligation could be called support in a divorce decree or court order, and yet not actually be “in the nature of” support. The bankruptcy court looks beyond the label given to a debt in the separation or divorce documents to what kind of debt it actually is under the unique facts of the case. Practically speaking, if an obligation is labeled as support, most of the time it will indeed be “in the nature of” support. But not always, so it’s worth looking deeper.

So what’s an example of a debt which is called support but is not really “in the nature” of support? This is always in the discretion of the bankruptcy court, but here’s one example which would likely not be “in the nature of support. Imagine a personal loan provided to the two spouses during their marriage by one of the spouse’s parents. In the subsequent divorce, the divorce decree obligated the other spouse to repay that loan by paying making payments of “spousal support” until that loan was paid off. In that obligated spouse’s subsequent bankruptcy case, that obligation for so-called “spousal support” would likely be seen as one not “in the nature of” support. Instead the court could well see that obligation for what it really is: an obligation for one spouse to pay a marital debt, not one actually to pay spousal support.

But this cuts in the other direction, too. An obligation “in the nature of” child or spousal support can be called something else in the separation or divorce documents but would still be treated as a support obligation and not discharged in bankruptcy.

Any Possible Benefit from Chapter 7?

Usually the best thing that a “straight” Chapter 7 can do to help with your support obligations is to discharge your other debts so that you can better afford to pay your support.

Beyond that there is one other relatively rare situation that can help if you owe back support payments—an “asset” Chapter 7 case.

In most Chapter 7 cases, all of the assets that the debtors own are protected by exemptions, so the debtors keep all their assets. Nothing has to be given to the trustee. Since the “bankruptcy estate” contains nothing, it’s a “no asset” case.

But if you do surrender anything to the trustee—usually something you no longer need or that is worth giving up for the benefit of doing a Chapter 7 case—the trustee will pay your creditors out of the sale proceeds of whatever you surrendered. And guess what’s the first thing that gets paid by the trustee out of the “bankruptcy estate”? Support obligations owed at the time your Chapter 7 case is filed are paid ahead of any other creditor (after the trustee’s fees and costs). So if you owe back child or spousal support, some or all of it could be paid this way.

Any Possible Benefit from Chapter 13?

Although a Chapter 13 case does not discharge support obligations any better than a Chapter 7 one, it still gives you a potentially huge advantage: Chapter 13 stops collection activity for back support obligations. Chapter 7 does not. This is significant because support collection can be extremely aggressive, in many states including the potential loss of your driver’s license and even occupational licenses. Then after stopping these, Chapter 13 provides you a handy mechanism to pay off that back support, usually allowing you to pay that debt ahead of most or all other debts. Sometimes you can even reduce how much you must pay to your other creditors by the amount of back support, in effect allowing you to pay your back support “for free.”

Although Chapter 13 does not discharge any obligations “in the nature of” support, unlike Chapter 7 it does discharge other obligations arising from a separation or divorce decree or settlement. So as to those relatively rare obligations discussed above which are labeled as support obligations but in fact are not “in the nature of” support, they would be discharged  under Chapter 13.