Adding Bankruptcy To Divorce May Not Give You The Relief You Are Looking For Obermayer Rebmann Maxwell & Hippel LLP

Times are tough and you can be motivated to make a change, however, it’s important to note that you can’t transform your whole life at once. While nothing legally prevents a spouse from declaring bankruptcy during a pending divorce, in general, the overlap of the two only complicates and delays both processes. You might think you’re killing two birds with one stone, but as you may have heard in the past, the running is slow and steady.

When filing for bankruptcy, the majority of your assets are part of the bankruptcy estate. Once you file for bankruptcy, an automatic stay is granted to all assets and property in the bankruptcy estate. This stay not only creates a freeze on all assets, but it prevents creditors from attempting to collect, thus allowing the bankruptcy court to determine your debt-to-asset ratio and decide which of your assets can be used to offset some of the debts. in the field.

Generally, bankruptcy takes precedence over divorce. A Chapter 13 bankruptcy action normally takes three to five years to complete, while a Chapter 7 bankruptcy action will often be finalized in about three to six months. Therefore, if your divorce is in progress or if you plan to file for a divorce in the near future, expect to take into account the automatic stay that has been granted to these assets. This is an important issue to consider, as the stay can make it extremely difficult for the family court to access and divide your assets until the bankruptcy action is completed.

Usually, bankruptcy courts do not release an individual from any debt that is considered a “domestic support obligation”. These types of obligations include alimony, child support, and maintenance debts that accrued before, on or after the date of the bankruptcy reorganization order. Maintenance obligations arising from separation of property agreements, divorce judgments and court orders are all included within the scope of a national maintenance obligation. A bankruptcy court is not bound by how a domestic support obligation is characterized in a divorce judgment or settlement agreement, and often what a court considers an obligation is not always immediately obvious. . For example, the obligation to pay the mortgage, the costs of dividing a marital property or even the attorney’s fees for the marital action can all be considered as maintenance obligations, because their function is to provide a form of support for a dependent spouse. Whether these items qualify as domestic support obligations also depends on your particular situation.

Another thing to consider if you plan to file for bankruptcy during a divorce is that the bankruptcy action creates a conflict of interest, which prevents the divorce lawyer from representing both spouses. Although generally, the divorce action itself creates a conflict between the spouses and the use of the same lawyer in a divorce action is strongly discouraged. The reverse also applies if you have hired the same lawyer to represent both of you in the bankruptcy action; If you have the same bankruptcy attorney and you are filing for divorce, that attorney may have to withdraw because of the competing interests of each party in each separate action.

Now that you know that it is not better to attempt to handle both stocks at the same time, how do you decide which stock to file first? There is no fixed answer. The advantage of filing for divorce first may be that your joint income is too high to qualify for a Chapter 7 bankruptcy case, but you may be able to qualify individually after the divorce is final. Additionally, if the divorce is handled properly, it can lead to the possibility of moving some assets out of the bankruptcy estate, protecting those assets from your ex-spouse’s creditors.

The advantage of filing for bankruptcy first may be that jointly filing will process all debts in the same bankruptcy and may also increase your exemption amount. The bankruptcy action will also help eliminate the debt that neither spouse wants so that it does not become a problem in the divorce action. Plus, it’s also easier for you and your spouse to share costs and attorney fees.

Both filing for bankruptcy and divorce are important steps. Determining which action to take first depends on your own individual situation and the benefits that each bring to those circumstances. To help you determine this, it may be a good idea to consult a lawyer who will advise you on the best procedure for your personal situation.

About Marc Womack

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