Bankruptcy and Divorce: You Will Survive

Bankruptcy and Divorce: You Will Survive

It’s not a match made in heaven, but bankruptcy and divorce often pair up hand-in-hand. Many people who go by divorce end up in poor financial condition and find no other different but to declare bankruptcy for a fresh start. Likewise, some couples who file or are on their way to filing bankruptcy have suffered the inmesurable toll and stress of being thorough in debt and marriages are strained beyond reconciliation.

If you are in the midst of a divorce and bankruptcy is being contemplated, it is highly advisable to seek the advice of a bankruptcy lawyer before finalizing the divorce because the divorce settlement agreement or court order equivalent will likely affect what you can and can’t do in your bankruptcy. It is important to understand how assets, debts and obligations that are the subject of a divorce will be treated in a bankruptcy case.

The Debt You Can’t Get Rid Of: the DSO

In bankruptcy, how debt is characterized determines, in part, if it is unprotected to “release” (the obligation to pay back the debt is extinguished in bankruptcy). The bankruptcy code, 11 U.S.C. 523(a)(5) exempts from release a “domestic sustain obligation” or “DSO.” Pursuant to 11 U.S.C. 101, a DSO includes debts that are characterized as alimony, maintenance or sustain as produced by a divorce decree, character settlement agreement or other similar court order. consequently, the way that obligations are distributed in a divorce will dictate whether that obligation will be “dischargable” in the bankruptcy. Simply put, if the obligation arises due to sustain, it won’t; if it arises due to character settlement, it has a better chance of being dischargable.

Joint character
In a divorce, the law of the state in which you live and file will dictate how a divorce court should go about dispensing of marital assets. If however, a bankruptcy is filed while the divorce is in progress, the bankruptcy court will determine the equitable proportion of character and has the strength to “stay” a divorce court from proceeding on any determination of the division of character that is owned, in whole or in part, by the person who filed for bankruptcy relief – the debtor. This method that timing is, again, meaningful to knowing when it is best to file bankruptcy when a divorce is involved because it will greatly affect the dispensing of character under the divorce.

In the divorce court setting, the husband and wife may chose to work something out amicably among themselves; if bankruptcy is filed by either party while the divorce is nevertheless in progress, it will be the bankruptcy court, not the parties, that makes the determination as to the division (and possible seizure and liquidation) of jointly held character.

Like a lion in wait, so is the bankruptcy Trustee stalking assets
Another reason to make sure the divorce is finalized before filing bankruptcy is the implication of assets vesting into the bankruptcy estate. When a bankruptcy case is filed, all of that individual’s legal and equitable interest in character is placed in the hand’s of a court-appointed bankruptcy Trustee. In Chapter 7 bankruptcy, the Trustee serves to determine if any non-exempt assets exist for liquidation for the assistance of the bankruptcy debtor’s creditors. Similarly, in Chapter 13 bankruptcy, the Trustee is interested in knowing if any non-exempt assets exist for the purpose of calculating if the debtor has hypothesizedv a repayment plan that meets the “best interest of the creditors” test pursuant to 11 U.S.C 1325(a)(4). Under either chapter of filing, if a divorce is pending and there are likely to be assets involved, the bankruptcy Trustee may keep up open the Estate for the final divorce decree to see how the assets were distributed. This would average, of course, prolonging the time the bankruptcy case is open. It could also consequence in the loss of assets awarded by the divorce court if those assets are not exempt under the applicable bankruptcy law.

When you’re in a bad situation, the natural instinct is to get out of it as soon as possible. Following this line of thought, some people who are divorcing and in need of bankruptcy try to get both done and over with in one setting. The well-informed person should realize that trying to do both at the same time will likely throw in unforseen consequences – some of which are detrimental to your best interests; it is consequently the best practice to finish one before the other.

You will survive the time of action, but you need to realize and accept that it is a course of action – don’t put the cart before the horse. If in doubt, always consult a local attorney for advice.

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