It is not uncommon to find within a divorce that financial issues are affecting a family. Depending on their extent, those financial problems could lead to filing for bankruptcy either by one or both spouses. Divorce is frequently the precursor to filing for bankruptcy. Consumer debt is an added factor that can put many families like yours over the top in terms of not managing their relational, familial, and financial stressors; if this situation sounds like the one you find yourself in, then you will want to pay attention to the information contained in today’s blog post.
Once you or your spouse file for bankruptcy, an automatic stay is imitated by the bankruptcy court. This stay will bar any creditor from attempting to garnish your wages or collect money from you that would go towards payment of your debts. To proceed with your divorce under a bankruptcy stay, you would need to seek an order from the court that would temporarily lift the visit to deal with matters related to your divorce.
Issues such as initiating a paternity lawsuit, establishing child support, or spousal maintenance orders are a few of the problems related to a divorce that deals with finances that would ordinarily not be allowed once a bankruptcy stay is initiated. However, you need to be aware that you cannot divide property part of the bankruptcy estate. Child custody, visitation of children, spousal support obligations, and withholding of income to pay child support or spousal support are allowed after a bankruptcy stay has been initiated.
How long does a bankruptcy stay remain in effect?
The bankruptcy stay will remain in place until the property in question is no longer a part of the estate or until the case is closed/dismissed. The holiday will also be lifted if your patient is discharged from the bankruptcy proceedings. A critical impact that a divorce case would have on a bankruptcy case is that determining what is and what is not part of a bankruptcy estate relates to the division of your community estate in the divorce. Let’s walk through a hypothetical situation to show precisely why this is the case.
Take a situation where you and your spouse own property that is considered community property under Texas law. You and your spouse would need to ask yourself to what degree that property comes into your bankruptcy estate, and would the bankruptcy stay related to that property. If your spouse attempts to divide that property in the divorce or negotiate for that property, then it is likely that the visit would remain in place. Before doing anything about that property within the divorce, you should contact the bankruptcy court and attempt to lift that stay.
The stay would be lifted if you can argue to the court that you have reasonable cause to do so. In the situation involving a divorce, your argument would likely have to be that a state family court would be in a superior position to determine the rights of you and your spouse to that particular piece of property. As long as your creditors would not be impacted, it is possible that the stay would be lifted, and the property division is allowed to proceed under your divorce case. The bottom line is that you do not need to have a stay lifted to get divorced, but if dividing up property is an issue, you need to request to have that stay lifted.
Family law issues are usually reserved to state court jurisdiction. The bankruptcy court should not venture into the issues related to your divorce. They are not equipped to deal with the problems as well as your family court.
What actions could be taken that violate the bankruptcy stay?
An action taken in response to an automatic stay being entered may render that action void or invalid. In some situations, the move would be void from the get-go, meaning that whatever was done was held to be ineffective. However, in other circumstances, the action done concerning the property affected by the stay could be effective if the bankruptcy court later lifted it. I would recommend that you speak to a bankruptcy attorney more about this, however. You would need to tell the attorney your specific circumstances to make a decision one way or the other.
What interests of yours fall under the purview of the bankruptcy court?
Once your bankruptcy action is begun, all property interests are now relevant to the bankruptcy proceedings. This means that as of the date of the filing of your bankruptcy case, all property of yours is subject to the automatic stay. This could include all debts owed to you, insurance rights that have not yet matured, and any interests you have in money that is being held in a trust.
The bankruptcy court in your case would have jurisdiction over all issues related to property in your estate. They include the ability to determine which spouse has the right to specific pieces of property. While a bankruptcy court can divide property between you and your spouse, it will usually decline to do so out of deference to your family court.
If you are married to the debtor spouse who has filed for bankruptcy, you need to be aware that it is up to you to make the bankruptcy court aware of your interests. You should file a motion with the bankruptcy court to have the automatic stay lifted so that the state family court can proceed without hindrance. A key point to understand is that if your divorce lawsuit was filed before the bankruptcy and is pending, the family court no longer has jurisdiction over your estate’s property.
Issues related to community property and bankruptcy
The bankruptcy estate comprises all interests that you, as the debtor and your spouse, held in the community estate when your bankruptcy was filed. Any property that is under your sole, equal or joint management when your case is filed would become a part of your bankruptcy estate and can be held by the court for the benefit of your creditors.
What happens if you acquire a property right before filing for bankruptcy?
Most property of your bankruptcy estate will be determined at the time your case is filed. Some property, however, that you acquire after the time that you file your bankruptcy will become a part of your bankruptcy estate. If you receive a parcel or become entitled to obtain property within 180 days of that filing, it will be a part of the bankruptcy estate.
How is income handled about divorce and bankruptcy?
Income on estate property is included as part of the bankruptcy estate. Your earned income is not part of the bankruptcy estate. In a community property state like Texas, you have an interest in your spouse’s earned income. Child support and spousal support cannot be discharged in bankruptcy. This counts amounts of money owed and future obligations of support that you have been ordered to pay.
What factors will a court look to when determining whether an obligation counts as support? Whether the court has entered a maintenance award is one factor that a court would consider. If spousal maintenance is applied for but denied the request, the financial obligation is not for support.
Next, a bankruptcy court will consider the need for spousal or child support at the end of the divorce. Your spouse’s age, work skills, educational level, and heath are all factors that will go into the analysis. The bankruptcy court will defer to the family court on how to characterize particular types of support. Many courts will look to ascertain your intent when creating an award of support to determine if those payouts belong in the bankruptcy estate. Long marriages are more likely to entitle your spouse to be paid maintenance by you.
I was considering the rights of creditors in connection with your divorce.
Most aspects of a mediated settlement agreement between you and your spouse are seen to be negotiated in good faith and are not subject to scrutiny from a bankruptcy court. The issue would have been that you and your spouse could conspire to have the property transferred out of your name and into your spouse’s. This would take it out of the hands of your creditors and have a potentially messy situation on your hands.
For instance, suppose it was alleged that you were depositing your paychecks into a bank account bearing the name of your spouse. This may seem like a situation that you all are concluding to keep money in your hands and outside of the hands of your creditors. However, if you have been depositing money this way for an extended period due to your not having a bank account of your own and the money was used to pay for ordinary expenses, it would be difficult to argue that this was collusion.
What factors do you need to be mindful of about a divorce?
When you are getting ready to have your family law attorney draft temporary orders or a final decree of divorce, you need to be aware that these orders can impact your bankruptcy case down the line. Here is what you need to be mindful of during a family law case that can make a difference later in your bankruptcy case.
First, spousal maintenance and child support payments and any money that you owe to your spouse concerning these issues are exempted from the property of your bankruptcy estate. This means that creditors would not be able to tap these areas to be made whole for the debts that you owe to them.
Second, spousal maintenance and child support payments can be deducted when it comes to a bankruptcy court determining what your disposable income is. Your income will not grow as a result of receiving these payments from an ex-spouse.
Third, you need to make sure that your attorney is straightforward when distinguishing between spousal maintenance and payments on debt.
Finally, at the beginning of your case, the bankruptcy trustee holds the same right as a party who has a lien against any of your property within the bankruptcy estate. As a result, you must make it known that any property that you own that is also subject to being named as part of the bankruptcy estate is clearly labeled as being exempt if it is determined to be so. This will avoid any problems if the property should ultimately be transferred to the non-debtor spouse.
The last thing that I wanted to mention to you is that a stricter schedule binds bankruptcy cases than divorce cases. Divorce cases can be wrapped up rather quickly but can also last a relatively long time, depending on the circumstances of your case. Be sure that your attorneys for each subject work together to coordinate your chances concerning any approaching deadlines.
Questions about family law? Contact the Law Office of Bryan Fagan
For all of your family law needs, I recommend contacting the Law Office of Bryan Fagan. Our licensed family law attorneys work tirelessly on behalf of our clients. We pride ourselves on being inside the courtrooms of the family courts across southeast Texas. Our attorneys offer free of charge consultations six days a week. These consultations allow you to have your questions answered and your needs addressed by one of our licensed family law attorneys.