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Bankruptcy and Divorce

Facing a divorce can be overwhelming to the parties involved. The situation can be made even worse if either party has filed or is planning to file for a divorce. Apart from the emotional challenges in a divorce, financial challenges arise. This is besides the division of the property a couple owns together. How the property and financial obligations are shared in a divorce can be significantly affected by bankruptcy. If a person wants to file for a divorce even as they are going through a divorce, it is their right, and no one can stop them. However, before doing this, speak to a lawyer that understands the effects of bankruptcy on divorce.

If you are going through a divorce and your spouse or yourself has filed for bankruptcy, an experienced divorce lawyer can help you through the process. Talking to the San Diego Divorce Attorney will help you make the right decision that will not negatively affect your life and have lasting consequences.

What to Consider When Filing for Divorce and Bankruptcy in California

When a person files for bankruptcy, every issue that relates to the assets and debts is halted or frozen. This is usually until the conclusion of the bankruptcy case. This means that if a couple was going through a divorce, anything that affects their property is frozen.

Every property acquired during a marriage in California is assumed to belong to the couple in equal measure, so are the debts. This is what defines a community property state such as California. However, in cases where the couple had signed a prenuptial agreement, the property and debts acquired before marriage are not taken into consideration.

When one files for bankruptcy, it creates an estate known as the bankruptcy estate. This estate includes the various types of property the couple accumulated throughout their marriage. Equally, the debts owed by the couple or acquired during marriage by either or both of them are considered. These debts must be settled from the bankruptcy estate prior to the conclusion of the bankruptcy case.

This means that a divorce judge cannot conclude on property division until the bankruptcy court finalizes with the property and the debts accrued. This will always cause delays in the process of divorce.

Filing for Bankruptcy, then Divorce

Sometimes both spouses can evaluate and see the amount of debt they have before filing for a divorce. Your attorney may advise that you file for bankruptcy first before your divorce filings. This is usually done on the understanding that after the conclusion of the bankruptcy case, it is easier to divide community property.

California is a community property state, as earlier stated means that a couple will share all debts as well as assets either of them or both jointly accrued during the marriage. This means that even as you enjoy sharing assets accumulated over your marriage, you will also share in the debts regardless of who acquired them.

For this reason, it is best for divorcing couples to file for bankruptcy together. If one spouse files for bankruptcy without the other and it goes through, the creditors have a right to seek payment from the other spouse. Debts in bankruptcy are only discharged for the individual filing for it. This makes it imperative to consult an attorney to avoid being stuck with marital debts when the other spouse has filed for bankruptcy.

Consequences of One Party Filing for Bankruptcy During a Divorce

Sometimes, one party may want to frustrate the other or come out of debt without informing their partner whom they are getting a divorce from. The spouse filing for bankruptcy may want to start life without debt, and the other spouse is not aware. When one partner files for bankruptcy, the family properties may be liquidated to pay his or her part of the debt.

Additionally, any debt not paid will be left for you to pay because your partner has had their debt obligations discharged. This can be devastating for one partner that will be left with debts to pay in addition to the pain of divorce.

Chapter 7 or 13 on Bankruptcy

In California, most debtors will apply for bankruptcy under either Chapter 7 or 13. Under chapter 7, the couple or the partner applying for bankruptcy will have to surrender all their nonexempt properties or assets. These assets are then sold to pay off debts owed to the creditors.

On the other hand, if one spouse or the couple files for bankruptcy under Chapter 13, the spouse or couple will not be expected to surrender any of their property for liquidation. Instead, the spouse or the couple will have to come up with a plan for repayment. This plan must, however, be acceptable to the creditors. Typically, repayment plans can last between three and five years while keeping up with the monthly payments required.

If one partner filed for bankruptcy without the other, at the end of either bankruptcy plan, their debts would get discharged. A discharge means that the spouse will not be accountable for the debts acquired.

According to the law on community property, a married couple on getting a divorce will divide the assets and debts equally. However, if one spouse files for Chapter 7 bankruptcy, he or she must surrender all the property they have an interest in. This means the other partner’s share is also designed to be liquidated for the debt.

If your partner manages to do this and the debt is not fully paid, the other partner will automatically assume sole responsibility for the liability. This could be very unfair to the other partner more so if they did not accrue the debt directly.

When a partner applies for chapter 7 bankruptcy, there is a stay that is effected automatically. A stay typically bars creditors from collecting money owed to them from the person while the bankruptcy case is ongoing. Unfortunately, the stay is not extended to the other spouse meaning creditors can collect payments from them. The demands by the creditors will persist even when the other partner has received a discharge on their debt.

However, if the other partner files for Chapter 13 bankruptcy, the stay will be extended to the other spouse as a co-debtor stay. However, when the bankruptcy is discharged, the stay is lifted, and the creditors will resume collecting any unpaid debt from the partner that never filed for bankruptcy.

Bankruptcy Impact on the Divorce Process

When a couple is divorcing and own property jointly, everything is divided equally, even the debts. If one of the couples, however, files for bankruptcy and gets declared bankrupt, the assets or property cannot be moved to the other partner as a settlement following divorce proceedings. Once a person is declared bankrupt, a trustee is appointed that deals with bankruptcy. Filing for bankruptcy does not necessarily mean that you will get away from paying your debts. This means that the trustee will control your property or that which you hold with your partner.

Without the permission of the trustee, the property cannot exchange hands to go to the other partner. The trustee, in this case, handles the properties and income belonging to the person declared bankrupt. The trustee in doing this is expected to make payments to the creditors whom the bankrupted individual owes. This means, following a declaration of bankruptcy, the priority is the creditors. Sometimes, if the party had children, special consideration may be made available.

Another impact bankruptcy has on divorce proceedings is that the appointed trustee the court to look into the transaction records that happened even five years before the application and divorce. This is usually aimed at preventing the bankrupt individual from moving their property to a family member or friend.

Sometimes a bankrupt individual may have anticipated filing for bankruptcy in the future and decides to transfer some of their assets to others to protect themselves. Trustees believe that assets transferred under such circumstances are often undervalued and aimed at defrauding creditors of their money.

Sometimes, a spouse may apply for bankruptcy to frustrate their partner following the impending divorce. If this is the case, the other partner can petition the court for an annulment of the bankruptcy if the other party is not really insolvent. Under the insolvency act 1986, the court is given the mandate to annul a bankruptcy order according to section 282.

How Various Properties are Affected by Bankruptcy in a Divorce

Although the property acquired during a marriage is jointly owned, spouses can also have a property that is not jointly owned. Before marriage, any property a person owned or debts before are not part of the marital estate or property. When a partner or couple files for bankruptcy while undergoing a divorce, it is essential to know the property that will be considered.

If one partner is declared bankrupt, the bankruptcy status does not affect property belonging to the other partner, but only their own. The nature or type of property can determine whether a creditor will take the entire property or part of it in the repayment of their debt.

Sometimes, a creditor can seek for the total value of the community property unless the spouses seek bankruptcy together or individually. In other cases, creditors can take only half of the property that belongs to the spouse that is not declared bankrupt.

Sometimes, creditors can ask for the property to be sold to recover the debt owed to them, and the rest goes back to divorcing couples. It is essential to understand that any liability or property a spouse had before marriage will not be claimed from the joint debts. This means when a divorcing couple files bankruptcy, the only property, and liability affected is what they acquired while in the marriage.

If one party files for bankruptcy and is declared bankrupt while the other party is not and owns property on their own, only the property jointly owned will be used to pay the debt. The other party is, therefore, not penalized for the property they own alone. A spouse owns property solely if he or she had it prior to marriage, or they received it as a gift or inheritance from a friend or relative even when married.

How Bankruptcy Affects Alimony and Child Support

As earlier stated, not all debts are discharged as a result of bankruptcy. Whether a spouse has filed for chapter 13 or chapter 7 bankruptcy, alimony and child support payments are not discharged. This means that even if a spouse is declared bankrupt, their obligation to their spouse or children remains. Once the court has ordered a spouse to pay support or alimony, despite the bankruptcy case ruling, the amount will remain the same. Additionally, if one parent is declared bankrupt, it does not affect their custody of children or their parental rights.

However, other costs that may arise during the process of divorce or after can be discharged.

Debts Not Affected by Bankruptcy During and After Divorce

A couple going through a divorce can file for bankruptcy to eliminate the obligations they have before parting ways. However, not all debts can be discharged or dismissed. The bankruptcy process cannot release some debts a couple may owe. These debts, aside from child support and alimony are:

  • Money owed to the government – the government agency that you owe money to must be paid regardless of one being declared bankrupt. If the monies to the government agency are jointly owned, the debt must be paid irrespective of divorce or bankruptcy.
  • Student loans – sometimes a couple can take a joint student loan to take their child through college or for one of them to further their studies. Whether the loan was benefiting one of them or their child, when a couple decides to divorce and file for divorce, the student loan must be paid. This may require them to sell assets jointly owned to offset the loan.
  • Court penalties and fines – these costs cannot be waved away by bankruptcy as well.
  • Fees for an attorney in a child custody case – this is also another debt that a spouse cannot get out of by filing bankruptcy.

What the above debts mean is that even if one partner is declared bankrupt and the other partner carries the other debts, the debts mentioned above, will not be discharged. This means they will not be sought from the other spouse, and both spouses remain responsible for the debts.

Paying Your Spouse Attorney’s Fee After Bankruptcy

In many California divorce cases, one spouse can be ordered to settle the lawyer fees of the other spouse. In most cases, the husband is normally ordered to pay the fees on behalf of the wife, although sometimes a wife can be ordered to pay as well. This will mean it is a new debt on the spouse ordered to pay.

If the spouse ordered to pay is declared bankrupt, they can list the attorney’s fees as a debt to be discharged. This will mean that the other spouse has to pay the attorney’s fees instead. However, the ex-spouse can petition to the court to challenge the decision. In such an event, the court will have to decide if the attorney’s fees will be classified as support or property settlement. If the court decides the attorney’s fee is a support debt, then it will not be discharged, and the party will be expected to pay. If it is declared as property settlement, then the payment will have to be submitted from the joint property the couple owns.

If the ex-spouse does not challenge the petition; however, the court can decide to discharge the attorney’s fee from the bankrupt spouse. When this happens, the other spouse will automatically take responsibility for it.

Effects of Filing for Bankruptcy Immediately Following a Divorce

Sometimes, an ex-spouse can file for bankruptcy immediately following a divorce. This may worry the other spouse about the willingness and ability of the court to enforce the divorce judgment.

Fortunately, this does not need to worry one. Under Section 523 in bankruptcy code, every support order cannot be discharged whether the person applied for chapter 7 or 13. Equally, according to chapter 7 bankruptcy, debt settlement owed to an ex-spouse cannot be discharged. However, this does not mean that you relax and not challenge an attempt to remove them.

Different courts may interpret bankruptcy laws differently, which may affect your rights if you ignore them. If a person applied for chapter 13 bankruptcy, it is essential to know that property settlements can also be dischargeable.

Find a San Diego Divorce Lawyer Near Me

Divorces can be messy, especially were finances and children are concerned. When a couple is married, everything they do is considered to be acceptable to the other. If a married man incurs credit card debts without the wife knowing, it will not matter, the wife is also liable for the debt. A divorce can be so acrimonious that one partner decides to apply for bankruptcy without informing the other. This will leave the other spouse to carry all the debts incurred during the marriage. However, a couple can discuss and realize the debts they have are hefty, and they are unable to pay them when they get divorced. This can result in them filing for bankruptcy together to avoid liabilities. Talking to a divorce lawyer will help you make the right decision that will not be detrimental to either party. The lawyers at San Diego Divorce Attorney can help you achieve an amicable divorce. Call us at 858-529-5150, and let us guide you through the process.


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