When bankruptcy and divorce occur simultaneously, a complicated legal scenario is created. Understanding the implications of this intersection is vital for those who find themselves navigating both processes simultaneously.

The timing of a marital split in relation to a bankruptcy filing can have significant ramifications. Filing for bankruptcy during a divorce can cause an abrupt automatic stay on the division of assets and slow down the divorce process, while the division of assets and debts during a divorce can impact the scope of the bankruptcy filing.

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Here are some additional scenarios to be aware of:

  • In the process of divorce, assets and liabilities are generally divided between the two parties. However, if bankruptcy is filed prior to the divorce, the bankruptcy estate takes control of all assets, possibly influencing what is deemed marital property and limiting the assets to be divided in the divorce.
  • Bankruptcy may discharge joint marital debts, but this does not always guarantee that a spouse will be relieved of all of their debt obligations under a divorce decree. Understanding how bankruptcy impacts individual and joint debt responsibility within a marital proceeding is essential.
  • Bankruptcy eliminates many kinds of debt, but it does not remove certain obligations, such as alimony and child support. These debts are prioritized and usually remain irrespective of bankruptcy proceedings. However, as bankruptcy can impact a spouse’s ability to pay, divorce outcomes may be affected.
  • Navigating these proceedings simultaneously necessitates that the parties consider both legal landscapes. Strategic planning is required to establish the best timing and order of filings, and an in-depth understanding of bankruptcy and family law is needed.

Financial Implications: Divorce and Bankruptcy

Under Chapter 7 bankruptcy, a court-appointed trustee is responsible for liquidating non-exempt assets to pay creditors back what they are owed. This process can take precedence over a divorce, thereby suspending the division of assets until the bankruptcy case is over. Therefore, the assets available for distribution may be significantly reduced, changing the equitable division originally expected.

Exempt vs. Non-Exempt Assets: Learning the distinction between exempt and non-exempt assets becomes vital when dealing with simultaneous proceedings. Exempt assets are protected from liquidation during the bankruptcy process and may include some personal belongings or home equity. Non-exempt assets are those subject to liquidation and will impact what assets remain to be divided.

The timing of the bankruptcy filing – as well as the Chapter – can also impact asset division. Filing for bankruptcy prior to divorce can streamline debt and asset division in the subsequent divorce – but it came also extend the length of the divorce process.

Joint marital debts can cause significant difficulty when there are simultaneous divorce and bankruptcy proceedings. While bankruptcy may discharge one spouse’s liability for joint debts, it does not remove the responsibility under a divorce decree. In other words, one party may still be liable to the other for some debts, even if they were discharged in bankruptcy.

Personal loans or credit card debts that are incurred in one spouse’s name are typically considered to be that individual’s responsibility. However, in community property states, these debts might be deemed marital liabilities. It is also important to note that bankruptcy does not discharge future obligations such as alimony or child support – which must be calculated in the finances of the divorce.
Navigating bankruptcy and divorce has complex and multifaceted implications. It requires a thorough analysis of both spouses’ assets and liabilities, a clear understanding of bankruptcy exemptions, and a careful approach to the timing of the bankruptcy filing deemed most appropriate. Working with an attorney who is knowledgeable in both family law and bankruptcy is your smartest strategy to ensure that both proceedings are handled professionally.

Richard V. Ellis is an experienced family law and bankruptcy attorney based in Sarasota.