Bankruptcy and divorce are undeniably two of life’s most significant events. When these events are on your horizon, it’s a good idea to think about the potential interplay between the two. This blog will discuss some factors you should consider about the coexistence of bankruptcy and divorce in your life.
Bankruptcy and Divorce 101
Let’s start with a brief overview of bankruptcy and divorce:
Bankruptcy: Bankruptcy is a legal process that people and companies may pursue when they have incurred too much debt. There are different types of bankruptcy that have different thresholds of eligibility and that bring different results. The core of bankruptcy law is federal, so it applies across all states the same way.
Divorce: Divorce is a legal process that allows two people to end their marriage. A divorce not only severs the marital bond but also makes provisions, as needed, for things like alimony; property division; and child support, custody, and visitation. Divorces are governed by state law, so in New Jersey (NJ), the NJ Statutes provide the relevant law.
You may have noticed that both bankruptcy and divorce are legal processes. However, one is governed largely by federal law (bankruptcy), while the other is governed by state law (divorce). It is this difference that can make the interplay between bankruptcy and divorce so difficult.
We’ll illustrate below a few of the most important issues that arise when bankruptcy and divorce coexist:
- The timing of filing bankruptcy and divorce
- Issues that arise when bankruptcy is filed while a divorce proceeding is already pending
- The potential impact of bankruptcy and divorce proceedings on a spouse
Should You File for Bankruptcy after Divorce or Before?
If you are thinking about filing for bankruptcy, you’ve no doubt canvassed the basics. Different eligibility requirements exist, depending predominantly on four things:
- Your home state
- Your marital status and household size
- Your income
- The type of bankruptcy you plan to file (Chapter 7 or Chapter 13)
Divorce can obviously impact some of these issues, particularly your household size and your income. It also impacts your bankruptcy exemptions. Needless to say, when deciding whether to file for bankruptcy before or after your divorce, you should consult with lawyers in your state who are experienced in these areas.
If Divorce Is Pending When Bankruptcy Is Filed . . .
One of the fundamental concepts in bankruptcy is that of an “automatic stay.” The automatic stay is a godsend to those who file bankruptcy because it effectively puts other legal proceedings, including those involving collections, on hold. The automatic stay also prevents creditors from taking actions such as making negative reports to credit bureaus, as well as contacting the debtor to try to collect money due.
In addition, if your divorce is already pending when one spouse filed for bankruptcy, the automatic stay puts divorce proceeding on hold. If you are the spouse who owes debts like child support or alimony, this can be very helpful. However, if you are the spouse who is owed money, this can be a problem. However, a NJ divorce attorney who is experienced in bankruptcy and divorce can file a motion with the federal court to allow the divorce proceeding to move forward. This can provide a huge measure of relief for spouses who badly need those funds.
Bankruptcy and Divorce: The Impact on You
A third illustration of how bankruptcy and divorce are interrelated lies in examples of the types of debt that may be discharged in a bankruptcy proceeding. Of course, the nature of the discharge depends on the type of bankruptcy case (Chapter 7 or Chapter 13), as well as the facts of the case before the federal bankruptcy court.
When considering divorce, three requests are common: requests to discharge claims of alimony, requests to discharge claims of child support, and requests to discharge claims of property settlements. It is ultimately up to the bankruptcy judge in charge of the case as to whether a debt will be discharged. With that said, here are the general rules that apply in most cases:
- Claims for alimony generally cannot be discharged in a bankruptcy proceeding
- Claims for child support generally cannot be discharged in a bankruptcy proceeding
- Claims for property settlement may generally be discharged in a bankruptcy proceeding if the divorce judgment has not yet been entered
As you might imagine, how divorce-related debts are characterized in official documents and agreements can make a big difference when it comes time to determine the debts to be discharged in a bankruptcy proceeding. As a result, it is critical to consult with a NJ attorney who is experienced in bankruptcy and divorce to ensure your best interests—and those of your children—are protected. If you need legal assistance with understanding the interplay of these important issues in your circumstances, contact me, Elizabeth Rozin-Golinder, by filling out my Contact Form or calling (732) 810-0034.