One of the most complex situation that can arise both legally and financially is when bankruptcy and divorce collide - and they often do because of the high costs and financial instability inherent in many divorces.
Most people want to do everything they can to avoid filing for bankruptcy, and this is especially so during a divorce process. But the truth is that many undergoing a divorce have little to no choice but to file bankruptcy.
At San Diego Bankruptcy Attorney, we understand the impacts divorce has on bankruptcy, as well as vice versa. We are intimately acquainted with the details of California bankruptcy laws both in general and as they relate to divorce, and we will know how to guide your through a bankruptcy process that coincides with a divorce process in a way that financially protects you to the maximum possible extent.
Contact us anytime 24/7 by calling 619-488-6168 for a free, no-obligation bankruptcy consultation and we will be happy to assist you!
How Bankruptcy Affects Divorce in California
Whether you, your spouse, or both spouses getting a divorce file for bankruptcy, this action can potentially slow down the divorce process considerably.
The reasons for this is that California divorces involve the division of property, not just people. All property has to be determined as either community (marital) property or the individual property of either spouse. Only the marital property is divided, normally 50-50 (but there are many factors that can change the division ratio.)
As soon as you file bankruptcy in a divorce, your property/debts are "frozen" until the bankruptcy is finished. That means divorce-related property division can't take place until after the bankruptcy has been fully processed.
Thus, bankruptcy basically puts the brakes on (temporarily) an in-process divorce. It creates a "bankruptcy estate" that encompasses marital property and from which debts not dischargeable are paid. After the bankruptcy court has finished, then the divorce court can divide any marital property that may still remain.
Also realize that debts are often considered (negative) marital property in a divorce. And only the person who actually files the bankruptcy can possibly get the debt discharged as to him/her. That means that if your spouse files bankruptcy and you don't, you could be left fully responsible for what were originally jointly held debts.
This is one reason why many couples choose to file bankruptcy jointly before a divorce. But even if your spouse is trying to shift all of the debt onto you, you may also be able to file for bankruptcy even if your spouse filed for it separately first.
How Will Each Kind of Property Be Affected by Bankruptcy?
As already alluded to above, all property involved in a divorce is determined to be either jointly held by both spouses or singly held by one or the other. It makes a big difference in both divorce-related property division and in bankruptcy proceedings which "kind" of property lies under consideration.
If one spouse files bankruptcy, it does not affect the other spouse's individual property, but only his or her own. Whether creditors can try to take all or only half of jointly held property, however, depends on the nature of the property.
In some cases, unless both spouses file for bankruptcy (jointly or separately), a creditor can go after the full value of the marital property. In other cases, they can only take the half belonging to the spouse who did not file for bankruptcy.
Also realize that in order to divide jointly held property in order to claim the half still owed to them, creditors can demand the property be sold and the proceeds divided.
But again, even with jointly held property and debts, it all depends on the exact nature of the property/debt in question. Some property types count as exemptions and so won't be affected at all if you properly file your exemptions paperwork. Other sorts of property may not be exempt and could only be saved, perhaps, in a Chapter 13 instead of Chapter 7 filing.
At San Diego Bankruptcy Attorney, we can help you sort through these types of thorny financial details so as to ensure you retain as much of your property as possible, regardless of who file for bankruptcy and when.
What About Child Support & Alimony?
Neither child support payments nor spousal support (alimony) are dischargeable under either Chapter 7 or Chapter 13 bankruptcy law in California.
What this means is that filing for bankruptcy cannot cancel your obligation to pay child support or spousal support either during a divorce or after one, after such support has already been ordered by a court.
Also, bankruptcy does not change child custody or parenting time (visitation) rights.
Now, the financial inability that leads you to file bankruptcy could, perhaps, affect (at least temporarily) how much child support or spousal support is to be paid. But that's not a given. Plus, if a court thinks you are trying to use bankruptcy as a way to lower your obligation or are purposefully underemployed for the same purpose (which underemployment might then lead to bankruptcy), they can "impute" income to you based on "what you would have made." Thus, there really is no way for bankruptcy to affect child/spousal support in a significant way.
However, other debts arising during or after a divorce could possibly be dischargeable in Chapter 7 or 13 bankruptcy. It all depends on the exact nature of the debt.
What If a Divorce Leads to My Home Being Foreclosed On?
It's not at all uncommon for someone in the middle of a divorce OR who has recently gone through a divorce to be unable to pay his/her mortgage and end up being served foreclosure papers.
Filing Chapter 13 bankruptcy may be able to help stop a foreclosure, even if it's already in process. The automatic stay imposed by filing bankruptcy can buy you at least 30 days, and likely a few months, before you will have to move.
Or, it can allow you to restructure your mortgage so that you need not lose your home at all, provided you can arrange a workable 3 to 5 year Chapter 13 payment plan.
Finally, consider that the extra time bought by filing bankruptcy could give you time to sell your home and recover the equity out of it. Often, these kinds of homes end up sold at "sheriff's sales" where you have to subtract numerous additional fees from any equity you recover. It's best to market your home with a "distress sale" as opposed to a sheriff's sale. But either way, you could at least recover something from you home equity instead of losing it all in a foreclosure and then use those funds to find a new home.
At San Diego Bankruptcy Attorney, we are experienced at helping people save their homes and/or their home equity when the aftermath of a divorce causes home foreclosure to threaten.
And we also know how to help those being threatened with eviction from their apartments, through filing bankruptcy.
What About Retirement and Life Insurance Accounts?
Things can also get complex when it comes to retirement accounts, like IRAs and 401Ks, as well as with whole life insurance policies that have a cash value.
There are many specific rules that apply here, but the general thrust is that most retirement accounts and life insurance plans are exempt in a California bankruptcy. There can be exceptions, however, if you recently made deposits to a retirement account, or if you exceed the cash value exemptions limits for your life insurance plan.
Divorce may impact how your life insurance and/or retirement plan payments are ultimately disbursed, but bankruptcy doesn't usually have much of an impact in this area. Still, to be safe, it's best to consult a bankruptcy lawyer who can review these issues and make sure you won't lose your retirement, won't lose the cash value of your whole life policy, and your beneficiaries won't lose the death benefit when you pass away.
Can Bankruptcy Prevent My Having to Pay My Spouse's Attorney Fees?
In many cases in a California divorce, one spouse will be ordered to pay the attorney fees incurred by the other spouse in the process of filing and pursuing the divorce. Most often, the husband is ordered to pay the attorney's fees of the wife; though there can be instances where the reverse might be true.
Divorce lawyers can charge as much as ten thousand dollars of more to handle a divorce case, and then, the court may order you to pay for this large additional debt. Often, the other spouse is unable to pay it and files for bankruptcy.
But can you list this kind of lawyer fee as dischargeable debt when you file bankruptcy in California? The answer is, you can list it, but your ex-spouse can then challenge that action and force a court hearing that will decide the matter.
The court will have to determine if they see the counsel fee debt as a form of "support" or a form of "property settlement." If the former, it can't be discharged; if the latter, it can.
If you list the counsel fee debt when you apply for bankruptcy, and your ex doesn't challenge it, it will likely be discharged in full.
The court, however, could either prevent its being discharged, allow it, OR even restructure the counsel fee debt but not let it be discharged. It goes on a case by case basis.
What If Your Ex Files Bankruptcy After the Divorce?
Oftentimes, an ex-husband (though it could be an ex-wife) will file bankruptcy not too long after a divorce. The other spouse may then be worried about the court's ability or willingness to enforce the divorce judgment.
However, there is no need to worry about this because Section 523 of the Bankruptcy Code states that all support orders are non-dischargeable in both Chapter 7 and Chapter 13 bankruptcy.
In Chapter 7 bankruptcy, property settlement debt owed to an ex-spouse is also not dischargeable. Thus, one could argue that you don't have to challenge attempts to discharge such debts; but, the practical reality is that, in fact, you do if you want to prevent them from being discharged. One should realize that some bankruptcy laws are in flux or are still interpreted differently by different courts; and if you don't stand up for your rights, the sad fact is they could easily be ignored.
Under Chapter 13 filings, property settlements are still officially dischargeable.
Why Is It Crucial to Consult with an Experienced Bankruptcy Attorney During and Following a Divorce?
Both during and after a divorce (and even before a divorce if you will file for bankruptcy jointly), you need the advice of a skilled, experienced California bankruptcy lawyer to protect your financial future.
There are many pitfalls that can occur when bankruptcy and divorce meet up, and only a knowledgeable lawyer can help you avoid them all.
For example, if your spouse files for bankruptcy and you don't, you could see a lawsuit filed against you by creditors of what was formerly jointly held marital debt. Whether you are unwilling to pay or simply unable, they could attempt to garnish your wages or impose bank levies to access your bank account.
You could face paying large sums (which you don't have) for your ex's lawyer's fees. If you spouse's car gets repossessed, and they sell it at auction but money is still owed on it, you could become liable for the full difference.
Even if your spouse ran up a credit card alone, because the card and debt was jointly held, it was joint debt. But if your spouse then files for bankruptcy, and you don't, you could face having to pay the full amount on the card.
These are only a few common examples, but the point is you need a good bankruptcy lawyer to protect you during a divorce. It may be you need to file Chapter 7 or 13; and if so, you need to claim the right exemptions or restructure your debt in the right way. Or, you may just need advice on what to do after you spouse or ex-spouse filed bankruptcy.
At San Diego Bankruptcy Attorney, we can assist you through all of these complex issues that no one could be expected to navigate without prior knowledge of California bankruptcy/divorce law.
Do not hesitate to contact San Diego Bankruptcy Attorney anytime 24/7 by calling 619-488-6168 for a free bankruptcy consultation. Or, stop by at our office at 750 B Street, Suite #2510, in San Diego.