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First comes divorce and then comes bankruptcy: What to expect when one follows the other

If you have not already done so, I would recommend that you go back to yesterday’s blog post from the Law Office of Bryan Fagan, PLLC and read our thoughts on bankruptcy and its potential impact on divorce. Obviously these are two processes that should not be rushed into and that is why we are choosing to focus some of our blogging efforts on it for this week.

Where we left off yesterday was with me posing a situation to you all: what happens when your spouse and you are in the middle of a divorce and you get word that your spouse has filed for bankruptcy as well. On top of having another legal case to worry yourself with what happens with your divorce in the meantime?

For starters, your divorce case will be stopped for a temporary period of time. Filing for divorce basically stops all debt collection efforts that are in place for the person who files. Issues related to the dissolution of property are related to your bankruptcy so your divorce could not proceed. Your spouse’s property is now under the jurisdiction of the federal bankruptcy court that she or he has filed their case in and cannot be divided up in your divorce.

The time period for which your divorce will be paused depends on the type of bankruptcy case your spouse has engaged in. A chapter 13 bankruptcy means a reorganization of your spouse’s debts and that can take up to five years to occur. A chapter 7 bankruptcy on the other hand is more expeditious normally, but can take a long time as well if the trustee in your spouse’s case takes their time in determining which assets to approve for sale and which ones to abandon.

Issues regarding your child in your divorce can proceed during a bankruptcy

Not all issues in your divorce are paused during the time of the bankruptcy. Non property issues, i.e. issues related to your child, are allowed to proceed. This means that child custody, child support and other portions of your divorce like this will go on as normal. A motion can be filed in order to request that the stay imposed on your divorce case by the bankruptcy court in order so that you and your spouse can continue with your divorce.

If a stay is granted by the judge in the bankruptcy case all jurisdiction is vested again within your family law court. This means that the divorce can proceed in all areas. I should be clear that this is the only process by which you can achieve a completed divorce while a bankruptcy action is also pending. If for some reason the stay were not lifted and your divorce proceeded anyways, the trustee in your bankruptcy case would not be bound by any of the decisions of the family law court in regard to property. This could lead to all of your efforts in the divorce being for naught.

What happens in the event that your ex-spouse files bankruptcy after your divorce has concluded?

On the flip side of this coin that we are currently examining, your now ex-spouse could file bankruptcy after your divorce has come to an end. Doing so can be a great benefit to you or a negative as far as you are concerned. We will need to explore this issue a little further in order to help you determine which would apply to you and your situation.

If your spouse owes your child support or spousal maintenance as a result of the final orders from your divorce you should know that he or she cannot discharge this obligation in bankruptcy. This could be great news for you and your children in the event that your ex-spouse has not been able to pay you the child support or spousal maintenance you are entitled to due to an overwhelming amount of debt associated with credit cards or other loans. By discharging these unsecured debts in bankruptcy that could open up a lot of money that could be utilized to fulfill their obligation to you and your children under the Final Decree of Divorce.

You have the ability to seek an order from the bankruptcy court that certifies that whatever obligations owed to you based on the orders of the family law court will survive the pending bankruptcy case your spouse has before it. Even if it looks like the bankruptcy has only been filed to eliminate unsecured, non divorce related debt you should still consider doing this.

A Chapter 13 Bankruptcy filing post-divorce complicates matters for you

As opposed to a discharge of unsecured debts as is commonly seen in a Chapter 7 bankruptcy, if your spouse files under Chapter 13 the situation becomes a little murkier for you as an ex-spouse. Since a property settlement was likely arrived at in your divorce the reason why Chapter 7s are sometimes preferable for an ex-spouse in your position is that they cannot be discharged in this type of bankruptcy, as we saw in the section above this one. On the other hand, they are dischargeable in a Chapter 13 bankruptcy. If your spouse has filed a Chapter 13 bankruptcy you may be in for a fight to maintain the obligations that were ordered in the divorce.

In your divorce it is likely that you and your ex-spouse both agreed to pay certain debts that appeared in both of your names, and in doing so would offer to indemnify the non-obligated spouse from any further liability under this debt. For example, if you are awarded the home in your divorce it is common that you would sign a Deed of Trust to secure assumption over to your spouse. This tells your ex-spouse that if you should fall behind in paying the mortgage that he or she can come in and take back the house through a foreclosure.

It is not uncommon for those filing bankruptcy under Chapter 13 to do so in order to remove the obligation of paying debts that he or she is solely liable on under the Divorce Decree. It happens as well that while your ex-spouse may be discharged from responsibility for paying a debt under bankruptcy proceedings that the creditor on the loan to a home, vehicle or other item may look to you for payment.

This may come as a surprise to you. After all- you signed the same divorce decree that your ex-spouse did and wouldn’t be blamed for thinking that doing so decided the issue pertaining to the debt once and for all. I do not relish having to tell a potential client or client that just because you and your spouse agreed to something in a divorce decree does not mean that a credit card company or mortgage lender was a party to the document and is similarly bound by its terms. The fact is these creditors were not parties to the decree and the law does not see it as a controlling document as far as debt liability is concerned.

If this situation sounds familiar to you my advice would not be to look back to your divorce attorney and instead advise you to talk to a bankruptcy attorney. The attorney who practices bankruptcy law can review your Final Decree of Divorce to see if the debt in question really is a part of the property settlement contained therein. It could be that if you gave up your rights to make payments on a debt in favor of your spouse doing so it becomes more likely that a bankruptcy court could determine that this is more in line with a future support payment than it is a property settlement debt.

Concluding our bankruptcy topic and starting a discussion on your marital home in tomorrow’s blog post

Stay tuned tomorrow as we wrap up our week long discussion on bankruptcy and divorce. We will then pivot into a subject that is very important to many people going through divorce- your family home. If this is a topic that is interested to you then please join us tomorrow as we venture into a discussion that should cover some relevant and interesting subject matter.

In the meantime if you have questions regarding family law in Texas please do not hesitate to contact the Law Office of Bryan Fagan, PLLC. We offer free of charge consultations with licensed family law attorneys six days a week here in our office.

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