Effect of Bankruptcy on Divorce Settlements

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It is not uncommon for bankruptcy and divorce to occur around the same time. Economic stress and debt often trigger discussions of divorce. Soon-to-be ex-spouses may be concerned about whether child support or alimony will be paid after bankruptcy is filed. They may be worried about who will pay for joint debts if one spouse files for bankruptcy. One or both spouses may wonder if a divorce settlement is enforceable once one spouse files for bankruptcy, which can have an effect on divorce settlements. At Grainger Legal Services, our Alabama bankruptcy attorneys can counsel people who intend to file before getting a divorce or who have already reached a divorce settlement.

The Effect of Bankruptcy on Divorce Settlements

When you file for bankruptcy, an automatic stay goes into effect and a bankruptcy estate is created. The estate will include all your non-exempt property. The automatic stay does not affect any aspect of your divorce except the division of bankruptcy estate property.

The divorce court cannot divide property that is already in a bankruptcy estate, whether that is the family home or stock or mutual funds. Thus, the division of property can be delayed by filing for bankruptcy, although custody, child support, and other family law issues may move forward. This can cause emotions to run high during the divorce proceedings, and the spouse not filing for bankruptcy may get frustrated.

The family law judge will only move forward with property division once the Bankruptcy Court gives it permission. Since Chapter 13 can take 3-5 years, bankruptcy can significantly complicate the division of property in divorce, and the spouse not filing for bankruptcy will probably need to ask the Bankruptcy Court to give permission to the family court to proceed with property division.

Some people file for bankruptcy after a divorce settlement has already been worked out. In that case, the filer's finances are taken over by the bankruptcy administrator, who will manage the filer's assets and either distribute the filer’s monthly payments to creditors in Chapter 13 bankruptcy, or sell certain assets to pay creditors to the extent possible in Chapter 7 bankruptcy. A former spouse with a signed divorce settlement agreement may be considered a creditor in the bankruptcy proceedings. In order to protect his or her rights, he or she may need to file a bankruptcy claim.

The timing of the divorce settlement can make a difference regarding what kind of effect a bankruptcy will have. When a debtor signs the divorce settlement papers six months or fewer before filing for bankruptcy, the settlement may be reduced by the administrator, who will scrutinize the settlement agreement to determine if the property division was actually equitable. If the administrator believes the division was not reasonable, he or she may file an avoidance action, although this is not typical. When the divorce settlement was reached more than six months prior to the filing, the administrator is extremely unlikely to file an avoidance action.

In some cases, bankruptcy is filed specifically because of the expenses of divorce. Some bankruptcy filers are left with little money after paying their alimony or child support, and finding a new place to live. Obligations to pay child or spousal support cannot be eliminated by bankruptcy. However, if you owe your ex-spouse money for some reason other than alimony or child support, you may be able to get a discharge of this debt during bankruptcy.

Consult an Alabama Attorney for Guidance on Bankruptcy

At Grainger Legal Services, we can counsel you on the effect of bankruptcy on your divorce settlement and other financial decisions that may be intertwined with your divorce. From offices in Montgomery, Prattville, and Troy, our Alabama bankruptcy lawyers advise individuals who are filing under Chapter 13 or Chapter 7. Call us at (334) 260-0500 or contact us online to schedule a free consultation.