Bankruptcy After Divorce

You've already been though a divorce and now you find out that your ex has also filed bankruptcy. How do you protect yourself and make sure that your divorce agreement is honored?

When your ex-spouse files for bankruptcy, all efforts to collect any debts have to stop unless they fit within one of the exceptions in the bankruptcy statute. This is known as the "automatic stay." The most important one for you when your ex-spouse files for bankruptcy is the one that excepts from the automatic stay the commencement or continuation of a proceeding to establish or modify a support award or collect support from property that is not property of the bankruptcy estate. 11 U.S.C. 362(b)(2).

How Bankruptcy Affects Support Obligations

Current support debts survive a bankruptcy without the need for you to have to go to bankruptcy court.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, among the changes in creditor priority is that unpaid child support and alimony has priority over any other creditor, including taxes owed. If you are owed back support it is very important that you file a "proof of claim" with the bankruptcy court to receive payment.

The new law requires the trustee in bankruptcy, if there is a claim for a domestic support obligation in a case, to provide written notice to you, the holder of the domestic support obligation claim, and to your state's Child Support Enforcement Agency. A notice at the time of filing and a second notice at the time of discharge are required. In the notice to you, the trustee must provide contact information for your state's Child Support Enforcement Agency.

Bankruptcy and Property Settlements

The new bankruptcy law made non-support obligations from a divorce or separation non-dischargeable in a chapter 7 bankruptcy if the discharge of the obligation would harm the spouse to whom the obligation is owed more than it would harm the person who owes it, your ex-spouse. 11 U.S.C. 523(a)(15). A debt that is non-dischargeable means that your ex-spouse is still responsible for it. You should file a complaint in bankruptcy court to get the property settlement debt excepted from discharge. If you don't file a claim with the bankruptcy court, the debt may be wiped out and you won't be able to collect it later.

The discharge in a chapter 13 case is somewhat broader than in a chapter 7 case. Debts dischargeable in a chapter 13, but not in chapter 7, include debts arising from property settlements in divorce or separation proceedings.

How do bankruptcy courts decide what's a support obligation and what's a property settlement? It varies greatly by state, but courts have based their decisions on such questions as:

• Does the obligation terminate or reduce with the occurrence of certain events, like remarriage or a child turning 18?
• Is the obligation in installments or a lump sum?
• Are there minor children?
• What is the relative health and education of the parties?
• Was there a need for support at the time of the divorce?

The way in which the divorce decree is written can reduce the chance that the bankruptcy court will discharge the debt. You can reduce the likelihood that the debt will not be discharged by labeling the debt payments as either support or alimony in the decree.

The Bankruptcy Process

If you're listed as a creditor on your ex's bankruptcy petition, you should receive notice from the bankruptcy court of the filing and information about the date and time of the first meeting of creditors (known as a "341 meeting"). You should also receive information on the deadline for filing a claim and a proof of claim form for filling out.

But whether you have notice of your ex's bankruptcy from the court or just through random gossip, you are responsible for finding out what's going on and doing what you need to do to protect your interests. Don't bury your head in the sand: find a lawyer and protect yourself.

Returning To Divorce Court After Bankruptcy

If the bankruptcy court allows your ex to discharge debts owed to you or third party creditors under your divorce decree, you have the option of returning to divorce court to ask the court to increase your alimony or child support based on a change in your financial circumstances due to either the necessity to pay additional debt or the reality of not receiving property you were awarded.

Unlike alimony and support payments, the terms of a property settlement are usually not subject to change because of changed circumstances. There are exceptions, like fraud or duress. You will have a heavy burden of showing the court that fraud was involved even though your ex spouse filed for bankruptcy immediately after the divorce was final.

If you're the spouse who pays child support or alimony, there is nothing shameful about going back to the divorce court to ask for a reduction in support payments to fit your current reduced financial circumstances. It is much better that than being stuck with debt you'll never be able to catch up.

As you can see, the issues of bankruptcy after divorce are confusing at best, and highly damaging at worst. If you find yourself in this position, it makes sense to find a bankruptcy lawyer who can help you with all the issues.

Related Web links:

Glossary of Bankruptcy Terms