The Pitfalls of Bankruptcy and Divorce - ABA YLD 101 Practice Series

By Paul T. Davis

I am one of the few attorneys who had an active debtors bankruptcy practice before I started practicing family law. Because of this, I had somewhat of an advantage in already knowing how a bankruptcy could affect a pending or looming divorce action. Having now practiced for about eight years, I have found that the two areas of law intersect quite frequently. Here's a few things you need to know about the interaction of the United States Bankruptcy Code and your state's divorce laws:

Become acquainted with the provisions in Section 523 of the bankruptcy code. These provisions state that debts to a spouse, former spouse, or child for support or alimony are generally non-dischargeable. Additionally, and perhaps more significantly, debts that are assumed in connection with a property settlement agreement, separation agreement or divorce decree are also non-dischargeable. What does this really mean?

With regard to child support or maintenance/alimony, a debtor who files a Chapter 7 or 13 bankruptcy will not be able to discharge such an obligation. A debt for support or maintenance/alimony must be listed on the debtor's bankruptcy petition, but the debt is not supposed to be discharged when the bankruptcy court issues a discharge order. In a Chapter 13 context, a debtor may include payment of child support or maintenance/alimony in the debtor's Chapter 13 plan. Most often, these ongoing obligations are paid outside of a Chapter 13 plan and you will typically see only the arrearage paid through the plan. However, ongoing obligations can be paid through a plan.

Most often, you will see issues between divorce and bankruptcy arise when one party is attempting to discharge a joint debt that was assigned to one of the parties by way of a property settlement agreement, separation agreement or divorce decree. For example, Bob and Mary have a joint MasterCard credit card with a five thousand dollar balance. Bob assumes this debt in a property settlement agreement and later wants to discharge it in a Chapter 7 bankruptcy. Such discharge is prohibited by Section 523. In the event that Mary receives notice that Bob is attempting to do this, she may file a timely objection (be sure to check the timeline for the filing of objections to discharge because it is usually a pretty short window of opportunity). If Mary doesn't become aware of this until after the objection deadline has passed, she will probably need to proceed in state court in an enforcement action under the property settlement agreement.

Other issues where the two areas of law interact relate to the question of what issues may be dealt with in a divorce case when a bankruptcy case has been filed and is pending. To use our example of Bob and Mary again: lets say that Bob has filed for divorce and Mary then files a bankruptcy petition a week later. What may the divorce court issue orders with regard to? If Bob and Mary have children, the divorce court can generally issue orders related to child custody and visitation. The divorce court, however, may not divide any property or debts. Either a discharge order must be issued for the divorce court to proceed or the other party must obtain relief from the automatic stay in bankruptcy court.

If you are representing a person is seeking a divorce from a spouse that is in bankruptcy or is going to file for bankruptcy, you need to do some careful planning to protect your client. Many attorneys are inserting language into property settlement agreements and separation agreements that create a non-dischargeable maintenance/alimony obligation for a joint debt that a party attempts to discharge in bankruptcy. While this language may not be necessary because of the prohibitions contained in Section 523, it may help clear up a dispute in the event that a party does list a debt that would be subject to these prohibitions, but does indeed receive a discharge.

Being a skilled practitioner of family law does require a good deal of knowledge about bankruptcy. If the issues presented to your client are beyond your scope of knowledge, don't be afraid to consult with a knowledgeable bankruptcy attorney. These issues are sometimes complex and often can involve a great deal of money. The help of a bankruptcy attorney may end up saving your client a significant amount of time and resources.

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About the Author

Paul T. Davis, Esq., is an attorney with Skepnek Fagan Meyer & Davis, P.A. in Lawrence, Kansas

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