For many couples, going through a divorce is emotionally draining because you have to deal with issues such as child custody among others. You may also have to deal with bankruptcy issues, which will usually affect the division of property. The bankruptcy laws are not always easy to understand when you are a layperson. Thus, you will find it necessary to work with an experienced attorney to help in this process. The Los Angeles Bankruptcy Attorney has in-depth knowledge of critical legal aspects in bankruptcy and divorce, and our attorneys can help you make the right decision when filing for bankruptcy.

What is Bankruptcy?

Bankruptcy is the term used when an individual or business entity is unable to pay their outstanding debts. To be declared bankrupt, your assets will be assessed, and they can be used to pay part of your debts. Declaring bankruptcy will offer you or your business a chance to start afresh by forgiving the debts that you are incapable of paying. This also offers you security from the disturbing creditor’s calls while giving the creditors an opportunity to recover part of their debts. On completion of the bankruptcy proceedings, you will be relieved of your duties of paying the debts you already owed.

Most financial difficulties will come about when you and your soon to be ex-spouse decide to end your marriage. You are likely to incur the cost of spousal maintenance, child support and other fees you pay during the tough proceedings. Higher priced items such as real estate are very difficult to divide. Hence, you can be forced to sell. In the case where you had prior financial troubles, divorce will push you to the edge of filing for bankruptcy. During a divorce, you can decide to file individual or joint bankruptcy. However, in the case where you decide to file for joint bankruptcy, you could be forced to stay together for the sake of bankruptcy.

What Should Come First Between Bankruptcy and Divorce?

Filing for bankruptcy before finalization of the divorce will complicate the settlements for divorce. For simplicity of procedures, you should not let your divorce and bankruptcy overlap. Most people prefer to file for bankruptcy before the divorce. This is because once the chapter 7 (not 13 bankruptcy) is filed, the creditors will automatically be stopped from contacting you. During this period, the bankruptcy court will be sorting out your debts and assets. In the case where you let the bankruptcy and divorce overlap, the automatic stay prevents proper assets and property division which is the largest part of divorce proceedings. When this happens, the divorce may be dragged longer making it more stressful for you and your loved ones.

Although you should not deal with bankruptcy and divorce at the same time, it is important to choose which process should come first wisely. However, there are a few things you need to consider before you start your proceedings. Where you and your spouse are in good terms, it is best to file for bankruptcy before the divorce. This will enable you to share the filing costs and possibly protect you from paying the joint debt if you have shared property. Any property that you acquired before the divorce will be protected from seizure by unsecured creditors. Whether you choose to file bankruptcy individually or as a couple, the bankruptcy estate will include all properties listed in the petition.

In the case where your spouse decides to file for bankruptcy while you are separated, it is crucial to find out if any individually owned property was listed to be protected as joint property. California bankruptcy law considers that even when you plan to divorce your spouse, you are both responsible for debts accrued by each individual during the period you were married.

Can I File for Divorce when my Spouse is in Bankruptcy?

There are two common scenarios through which bankruptcy and divorce intersect. The situation is easier to deal with if you and your spouse file for bankruptcy and receive a discharge before starting your divorce proceedings. This is because you will have already discharged your debts. Thus, a few properties will be involved during the divorce settlements. However, if you file for divorce with a pending bankruptcy declaration, you will have a hard time getting both processes to be successful. In the case where your spouse is struggling with bankruptcy, it would be wise to wait for the finalization of this process before filing for a divorce. Bankruptcy proceedings take precedence over the divorce due to the automatic stay that prevents further court proceedings before the individual is granted relief from the bankruptcy court.

If you are hoping to file for bankruptcy and divorce, you need to consider where you live, how much property you have, and the nature of debts you have. If most debts are joint, you should consider filing for joint bankruptcy prior to the divorce. This will make the divorce easier since less property and debt is left to handle. If you are the spouse with the most debt, you need to discharge this debt prior to the divorce. If you are facing the divorce and bankruptcy situation, consider seeking the services of an experienced attorney to guide you through the proceedings.

Assigning the debts to each spouse during bankruptcy in divorce could be difficult and time-consuming. Ordering a spouse to pay a particular debt during the divorce will not change the obligation of the other spouse towards the creditors. In the case where your ex-spouse was ordered to pay for a joint debt, but they file for bankruptcy, the creditor may reach out to you for what you owed. This is because your property is not protected if the bankruptcy is not jointly declared. Trying to collect the amount you paid for your ex will see you back in court and will be an added liability. It is in the best interest of both of you to wipe out all your debt by declaring joint bankruptcy before starting your divorce proceedings.

Dealing with Divorce during Chapter 7 Bankruptcy

After marriage, most couples intertwine their financial lives and may end up getting into obligations, which are difficult to maintain in case of a divorce. Debt and financial instability will impact most aspects of your life and may end up causing you to divorce. Whatever the situation of your divorce, you have an option to either file for a chapter 7 or 13 bankruptcy. When it comes to liquidation bankruptcy (chapter 7), the process is faster and can take as little as a few months. If you choose to file for chapter 7 bankruptcy before a divorce, all your debt will get eliminated, allowing you to file for a divorce as soon as you want. Before you decide to file for the bankruptcy, there are a few factors you need to consider:

Household Income

Filing bankruptcy while still married will help save you money for attorney and filing fees. When you file jointly, the income is added and may exceed the limit required to qualify for chapter 7 bankruptcy. It is important to assess the joint income for you and your partner. If it exceeds the limit, it is wiser to wait until the divorce is finalized so that you can file for bankruptcy individually.

Personal Relationship with Your Spouse

Divorce has the greatest impact on your decision making since it is a matter of personal relationships. If you can effectively communicate with your soon to be ex-spouse, you can weigh the options and make a decision on how to file bankruptcy, for the benefit of both of you. If you have a rocky relationship and one spouse is uncooperative, it could be difficult, and both of you may end up on the losing end. Understanding how your relationship will affect the process will help in making the right decisions for yourselves.

Property and Asset Ownership

Because married couples own community and personal assets, it is important to understand how these properties will be affected by the chapter 7 bankruptcy if you decide to file jointly before the divorce. There are situations where you may benefit from the double exemption. Hence, you need to consider how much property is owed both communally and personally before filing for the liquidation bankruptcy.

Joint bankruptcy is a merger of two bankruptcies for you and your soon to be ex-spouse. If you are already struggling with the bankruptcy process and decide to divorce, you have an option to separate the cases. In this situation, you will file a motion for bankruptcy deconsolidation to allow you and your spouse to make your individual decisions for the case. Remember the very decision you make has consequences. Therefore, it is crucial to consult an attorney who is well versed with bankruptcy law.

Divorce in Chapter 13 Bankruptcy

Chapter 13 bankruptcy takes three to five years to be completed. Life changes a lot in five years, and if you and your spouse decide to divorce during this period, the pending bankruptcy will have a significant effect on your divorce. Since the bankruptcy will have been filed jointly with one defense attorney, the attorney is expected to resign. This is because they aren’t allowed to represent two people who are in conflict. In this case, it is important for you to speak to an attorney to explain your way forward.

Although getting a divorce in the middle of a chapter 13 bankruptcy makes it harder to work out the repayment plan, you don’t have to dismiss your bankruptcy case. There are a few options you could explore if you still want to continue pursuing a bankruptcy discharge.

Convert the Bankruptcy to a Chapter 7

It can be quite expensive to maintain two households even with a good income. If you were not able to qualify for chapter 13 bankruptcy due to the high amount of disposable income, having increased expenditure may allow you to convert your chapter 13 bankruptcy to a chapter 7 bankruptcy. This will help you dispose of all your debts through liquidation. It is important to note that chapter 7 may not necessarily work out to your best interests.

Stick to your Payment Plan

Even after getting a divorce, you can choose to continue with your regular payments for chapter 13 bankruptcy. This will be effective if you can work out a debt division plan with your ex. Otherwise, you may not afford to continue the plan as well as support two households.

Modification of your Repayment Plan

After a divorce, you may not have much of the disposable income to pay your chapter 13 bankruptcy. If you cannot manage to convert to chapter 7 bankruptcy, you might be able to lower your monthly payments by modifying the payment plan. This will be done by filing a motion with the court requesting a repayment plan modification. However, the judge only allows adjustment to unsecured creditors like the credit card bills and personal loans. It will be difficult to adjust your payments if you are paying the priority debts.

Bifurcating the Bankruptcy

In the case where you don’t want to share the bankruptcy with your ex-spouse, you can petition for the court to separate the bankruptcy into two. Once the case is separated, you will have the right to choose what suits your interests. You can decide to convert to chapter 7 or remain in chapter 13.

Which Debts are Non-Dischargeable when Filing for Bankruptcy in a Divorce?

If you choose to file for chapter 7 bankruptcy to eliminate debts, you need to understand that not all debts will get eliminated. The most common non-dischargeable debts when it comes to bankruptcy and divorce include alimony, which is the spousal support the court requires to be paid to the less earning spouse after a divorce.

Also when you are divorced and decide to file for bankruptcy, you will still be obliged to pay for child support. Additionally, the debts owed to the government, court fines and penalties, as well as the students’ loan, are non- dischargeable in bankruptcy. For all these non-dischargeable debts, you will be legally obliged to repay the creditors. After the bankruptcy case is completed, you can try to work out a plan to repay those debts. If you don’t take any step to settle these debts, the creditors will have the right to collect their money or even sue you for the unpaid debt. If you are not sure which debts are dischargeable in your case, consider seeking legal help.

When you file for a chapter 7 bankruptcy during or after a divorce, it is a privilege to get some of your debts discharged. Thus, your debt discharge request will be denied if you fail to abide by the rules listed on the bankruptcy code by failing to produce your taxation documents, violating a court order, failure to complete a credit counseling course, hiding your property with the aim of escaping debt settlement, destroying financial records or committing any other perjury in regard to the bankruptcy case.

Your bankruptcy attorney should help you understand the orders and the consequences of failing to abide by them.

Division of Property in a Bankruptcy and Divorce

In the case where you have a joint debt, and one spouse decides to file for bankruptcy, the other spouse will be liable to settle the remaining debt. This applies for credit cards, property and bank loans. Filing for bankruptcy will protect the sale of your home since the jointly owned property is considered bankruptcy estate. If your home is not highly priced, you will not need to worry since creditors will only come after valuable property to pay for their debts. Your ex must consult you to put anything other than the joint property as exemption from liquidation. Thus, they cannot use bankruptcy to protect their own interests for the divorce.

If your ex-spouse files for chapter 13 bankruptcy, they will keep contributing for the mortgage if they have been doing so. Otherwise, you will continue paying it on your own. Since the child support and alimony are protected in chapter 7 ad 13 bankruptcy, anything else which is not a family support debt will be lumped up with other debts.

Find a Bankruptcy Attorney Near Me

Although bankruptcy and divorce gives you and your loved ones a chance for a better start, the process is detailed and complicated. You should be careful not to plunge deep into more debt and to complicate the process further by making the decision to seek help from a bankruptcy expert. The attorney will help you understand the various aspects involved such as when to file for bankruptcy, what to expect when you file for chapter 7 or 13 bankruptcy and how it will affect the divorce process, among others.

For many years serving Los Angeles residents, the Los Angeles Bankruptcy Attorney has gained invaluable expertise in bankruptcy cases involving divorce. We are ready to hear and evaluate your case and see how we can help you. Don't hesitate to call us today at 424-285-5525!