Divorce can be expensive. It can also be the result of intense financial pressure on a household. Some people file for divorce because of their spouses’ spending habits or frustration with their standard of living. Other times, the pressure of an ongoing bankruptcy might lead to one spouse choosing to leave.
The opposite can also occur. One spouse may choose to file for individual bankruptcy while there is a divorce in progress. Any secondary legal issues that arise during divorce are likely to complicate the dissolution of marriage already underway.
What do spouses need to know about how bankruptcy might affect a divorce?
A spouse’s mid-divorce filing
If one spouse files for bankruptcy while a divorce is underway, the bankruptcy can directly impact the divorce. The courts provide an automatic stay, which may freeze assets and prevent the division of property. On the other hand, the automatic stay granted to one spouse can be beneficial for both, as it can prevent creditors from making claims against joint assets.
Unfortunately, those assets are still at risk of liquidation in a Chapter 7 filing if the trustee determines that there are non-exempt resources. Spouses can expect a much longer divorce and possibly canceled hearings until after the resolution of the bankruptcy case.
A pre-existing bankruptcy case
If the couple is already partway through the process of bankruptcy, it may be difficult to complete a divorce until after the courts finalize or dismiss the bankruptcy case. The actual division of assets usually cannot occur until the bankruptcy is complete. However, spouses can theoretically eliminate many of the debts that they may have otherwise needed to divide as part of the divorce process.
Other important considerations
Just as bankruptcy can complicate divorce, a divorce can also impact a bankruptcy case. Generally speaking, spouses who started bankruptcy jointly and begin divorce proceedings may need to obtain separate legal representation for the remainder of the bankruptcy process due to potential conflicts of interest.
Another important consideration is the impact of a discharge on financial obligations. People generally cannot discharge child support or alimony obligations. Finally, in cases where one spouse files and the other does not, creditors could hold the non-filing spouse accountable for the debts discharged by the filing spouse.
People facing unusually complex divorces need to ensure they protect themselves so that they can rebuild financially after their divorce. Working with a family law attorney who understands how bankruptcy can complicate divorce proceedings can be invaluable in this regard.