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Divorce and Bankruptcy
Financial problems are often a source of stress in marriages. Sometimes this stress can lead to divorce proceedings. A bankruptcy filing can be the most severe form of financial stress. It is not unusual for a bankruptcy filing and a divorce proceeding to occur at nearly the same time. There are ways for the parties to a simultaneous or near-simultaneous bankruptcy and divorce proceeding to ease this process.
Which should happen first, divorce or bankruptcy?
Every situation has its own wrinkle. However, if three conditions exist, filing a joint bankruptcy action first may very well be the quickest, most cost effective option for both parties and for both the bankruptcy and divorce cases. These conditions are:
- 1.Both parties know that they will eventually make use of bankruptcy.
- 2.There are very few assets that would be exempt under bankruptcy laws, and thus not that much property to be divided in the divorce.
- 3.The parties are not so hostile that they cannot cooperate in the bankruptcy proceeding. (Legalzoom.com)
What if one spouse will not agree to a joint bankruptcy?
One spouse may file bankruptcy on his or her own. That spouse would be able to discharge the debt. Because both spouses are responsible for the debt incurred during marriage, the creditors would then simply pursue collection for the entire debt against the non-bankrupt spouse. A divorce court may not order the spouse who has discharged the debt to pay it, and a divorce court cannot keep creditors from pursuing the non-bankrupt spouse, since the divorce court has no say over the contract between the creditor and the debtor. The divorce court only has the ability to assign debts between the two spouses. In order to prevent this situation, the non-filing spouse may wish to join in the bankruptcy case (Californiabankruptcy.com).
What happens if one spouse starts bankruptcy in the middle of divorce?
If a bankruptcy is filed while a divorce action is pending, the financial matters of the divorce action would be halted under the "automatic stay" provision in the bankruptcy code. This means that the divorce may not go forward until the bankruptcy case is over without permission from the bankruptcy court. Non-financial matters, such as child custody, needing to be resolved would not be halted (Legalzoom.com).
What if one spouse files for bankruptcy after the divorce is final?
Sometimes one spouse will take bankruptcy after the divorce. However, recent changes in the bankruptcy code keep the spouse from expunging any debts in bankruptcy that are "in the nature of support." This makes debts such as child support or spousal support arrears non-dischargeable (Californiabankruptcy.com)
Divorce or bankruptcy individually can be very complicated proceedings. When dealing with both issues at the same time it is particularly important to work with a knowledgeable local family law attorney. For a free 1-Hour Consultation with a San Jose family law attorney, please contact The Law Office of Matthew J. Rudy.