While filing bankruptcy normally allows a debtor a “fresh start” in regard to debts owed, not all debts are dischargeable. Dischargeable debts usually include those common debts, such as medical bills, credit card debts, and other consumer debts individuals often find themselves in when in the normal course of business.
However, there are certain debts that are not dischargeable and thus remain after the bankruptcy is completed. These specialized debts include student loan debts, certain state and federal taxes, and, often most contentious, debts accrued during the course of a divorce. In the United States, almost 50% of all marriages end in divorce. More recently, the pandemic has taken a heavy toll on married couples both financially and emotionally, causing many to contemplate filing for both divorce and bankruptcy. While married couples can navigate a bankruptcy proceeding together, financial difficulties very often lead to divorce. In those cases, it is smart to keep in mind just what debts are dischargeable in a bankruptcy proceeding that follows a divorce, and what debts remain after.
What Happens When Bankruptcy Is Filed Prior to a Divorce
If a married couple decides to file bankruptcy, they can file together under one filing. While this may be more cost effective for the parties, the couple will need to stay married until the bankruptcy process is complete. However, this scenario will often save the most resources for the couple and will allow for discharge of most marital debts.
While this route may save the couple some money in terms of filing together, this will not prevent a divorce court from ordering either couple from being responsible for marital debt that survives the bankruptcy, alimony, or child support. Further, the debts assigned by the divorce court are likely those not to be dischargeable in bankruptcy even should a spouse decide to file again.
What Happens When Bankruptcy Is Filed during a Pending Divorce
In the bankruptcy context, it is important to keep in mind how any other activity a debtor may be involved in is affected by the “automatic stay.” In summary, when the bankruptcy petition is filed, the automatic stay goes into effect immediately. The purpose of the automatic stay is to prevent creditors and debt collectors from attempting to collect on the debts owed and puts all other legal proceedings on hold. All other aspects of the divorce proceedings may continue, except for the division of assets and collection of debts.
If a debtor files a bankruptcy while a divorce is ongoing, the automatic stay can put a hold on the divorce proceedings. If the debtor is the spouse that owes alimony or child support, this can be very helpful, at least while the bankruptcy is ongoing. This will put a freeze on any assets or property and allow the bankruptcy court to understand and organize the debts that you do owe. This will extend the divorce proceedings, as the divorce court will be unable to continue to distribute property and assets without awaiting the results of the bankruptcy proceedings.
Despite the above, a debtor spouse cannot use the bankruptcy to simply walk away from all marital debt. Regardless of what a bankruptcy court decides, a divorce court follows the theory of equitable distribution. This means that the divorce court will take into consideration all factors that a divorcing couple is facing, and make a ruling based on those factors. These factors include the income of both parties, debts incurred by the parties, and the parties’ respective financial status. If one party recently obtained a discharge in bankruptcy, the divorce court will still attempt to distribute whatever marital debts and assets are left equitably. This means that, although bankruptcy was filed and discharge was obtained, the debtor spouse may still be left with debts once the divorce proceedings are finalized.
What Happens When Bankruptcy Is Filed after a Divorce Is Finalized
Generally, when a divorce is finalized, the parties will obtain either a settlement or judgment determining exactly what marital debts, and assets, now belong to them. This can include the mortgage on the marital home, any car payments still due, or any other debts accumulated while the couple were married. Often, these debts may be discharged. So long as they are consumer debts, such as credit card or medical debt, they can be discharged.
Divorce Debts That Are Not Dischargeable
In a bankruptcy proceeding, certain debts are non-dischargeable. This includes debts arising from a divorce proceeding. While this does mean that alimony and child support are not dischargeable in bankruptcy, this also tends to include those extraneous debts the court orders paid on behalf of the non-bankrupt spouse. For example, if the divorce court orders attorneys’ fees to be paid by a spouse, and deems such attorney fees maintenance or support, then subsequently that spouse declares bankruptcy, that spouse cannot discharge those attorneys’ fees.
Can a Spouse Lift the Automatic Stay?
Certain types of creditors, such as home mortgage and vehicle lenders, who wish to continue its collection action against the debtor or the debtor’s property can generally only do so if the debtor fails to make a payment or keep a promise made after the filing of the bankruptcy (for failing to make a payment that comes due post-petition on a car or home, for example). The debts that accrued based on the obligations arising before the filing of the bankruptcy are handled in the bankruptcy process. If the creditor can show “cause”, then the creditor may go into Bankruptcy Court and file a Motion to Lift the Automatic Stay.
A former spouse attempting to collect child support or alimony from a debtor is exempt from the automatic stay and may proceed in state court against the debtor after the filing of the petition, but only for money owed after the petition was filed. While the pre-petition money will not be discharged in the bankruptcy proceedings, they will not be able to be collected during the pendency of the bankruptcy proceedings.
If you find yourself in a situation where you need more support, please call the NJ law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP for a free consultation.
