Going through a divorce is stressful enough for most people. In some instances, a divorce becomes more complicated when a spouse wishes to file for bankruptcy. What does this mean for the divorce, and how does it impact the parties moving forward?

If you are going through a divorce and your spouse has decided to file for bankruptcy or you are considering filing for bankruptcy, you need to do two things immediately. First, you need to notify your attorney who is handling your divorce. Secondly, you need to consult with a bankruptcy attorney. Only someone who specializes in bankruptcy can educate you on whether you want to file for bankruptcy and whether you want to file jointly with your spouse.

Ok, we have attorneys telling you that you need to see an attorney. Case closed. Short Discussion. We wish it were that simple. When one or both spouses file for divorce, it will potentially bring the divorce process to a halt until bankruptcy is completed. This is because we don’t know what overall marital debt will be. If we negotiate for one party to get more equity because they are keeping debt, just for them to file bankruptcy and eliminate that debt, we may have just entered into a bad deal. The best negotiators know all of the facts when they are trying to settle.

Divorces break down into two major components that are affected differently by bankruptcy. The first is support. If you have a case open for child support, spousal support, APL, or alimony, the bankruptcy will not prevent you from receiving or paying support. In bankruptcy law, this is known as a domestic support obligation, meaning it is a debt owed to a spouse, former spouse, child, or parent/guardian of the child that is in the nature of alimony, maintenance, or support. The law is clear that these types of debts take priority over other creditors. If you fall in arrears, it can even prevent you from being able to file bankruptcy. Put simply, you cannot avoid payment of child support simply by filing for bankruptcy.

The second major part of a divorce is the division of property. This is where things become complicated. In your basic divorce, we have to add up all the equity and add up all the debt to determine what is an equitable distribution (a fair split) of the marital estate. Let’s say Husband is going to keep $100,000 of credit card debt without Wife being responsible for it. In that case, we may give Husband additional property elsewhere to make up for the debt he is keeping. But if Husband goes and files bankruptcy after we have settled this case, he’s keeping the benefit of the additional equity while also eliminating the debt. This is why it’s best to resolve the bankruptcy case before finishing negotiations for a divorce.

What if Husband is supposed to transfer a large sum of money to Wife, only for that money to be taken in bankruptcy court? We can do our best to protect our clients, but these are very real concerns. We include language in all our settlement contracts that bankruptcy does not discharge one’s obligations in the divorce. So, we may be able to still get Wife her money by seeking payment from one of Husband’s other assets. Still, these issues highlight why it’s so important to pause the divorce and finish the bankruptcy first.

At the end of the day, you always want to be fully informed and prepared when making any major decisions. If you are going through a divorce or considering bankruptcy in the divorce process, our Lancaster PA divorce attorneys would be happy to help.  Call us at 717-358-0600 or fill out our contact form – https://lawlancaster.com/contact-us/ to schedule your consultation.