Family Law Issues and Bankruptcy
For those divorcing or divorced, the bankruptcy issues generally fall into three categories:
- Support: discharge, payment and the automatic stay
- Property settlement: what happens to debts between spouses
- Liability to others: who is liable for the debts at divorce
Sometimes, one or both spouses can benefit from a bankruptcy filing:
- dischargeable debts are eliminated, leaving more money for the payment of on going expenses, including support.
- taxes can be paid, without interest, or even discharged where sufficiently old.
- the divorce is simplified by the elimination of much of the family debt
One spouse files
When only one spouse files bankruptcy, state family law and federal bankruptcy law intersect. While most issues in bankruptcy are handled by the Bankruptcy court, it is not uncommon that family law issues will be sent back to State District court to be resolved before a bankruptcy can proceed.
Where there are non exempt assets, a bankruptcy filing by one spouse pulls all the community property into the bankruptcy estate and assures that the available assets are used to pay debts now. Most Chapter 7 cases, though, are no asset cases in which no distribution is paid to creditors because all of the assets are exempt.
The 2005 amendments to the Bankruptcy Code made debts arising in a divorce non dischargeable in Chapter 7, without any action required by the non debtor spouse. As a result, debts to even up the distribution of marital assets or obligations to hold the other spouse harmless from existing debts survive a Chapter 7 discharge. These obligations remain dischargeable in Chapter 13.
How is my spouse affected if I file bankruptcy alone?
Since a bankruptcy can be filed by one spouse without the other, this is one of the most common bankruptcy questions. A bankruptcy filing by one spouse does not bring the other spouse into bankruptcy. Neither does the bankruptcy of a spouse give the non filing spouse the full protection of the or the bankruptcy automatic staydischarge.
If you and your spouse are jointly liable to a creditor, the bankruptcy of one spouse does not relieve the other of paying the debt. Upon a bankruptcy, the creditor may look to the other spouse for payment, unless the bankruptcy case is under Chapter 13. If the debt is a consumer debt to be paid 100% through the Chapter 13 plan, the co debtor is protected by the co-debtor stay in §1301.
Generally, marriage alone doesn't make both spouses personally liable for a debt. Liability on contracts such as home loans and credit cards arises by agreement between the creditor and the debtor. Only persons who signed the loan or credit application are liable for the debt.
A joint tax return, however, makes both spouses liable for the total of the tax due.
If you have joint debts, you can expect the bankruptcy to be noted in some way on the credit record of the non filing spouse. There is uncertainty in the law at the moment as to whether it is proper to mention the bankruptcy of one debtor on the credit report of a debtor who is not in bankruptcy.
If you and your spouse own property together, that property may be included in the bankruptcy estate and be potentially available to pay creditors. In a community property state such as Texas, all of the community property is available to pay community creditors and any other creditors of the spouse who has filed. So the filing of one spouse could have significant impact on the other.
Community property discharge
When one spouse files bankruptcy in a community property state, the marital community enjoys the protection of the filing spouse's bankruptcy discharge. Section 524 of the Bankruptcy Code provides that any community property that the filing spouse and the non filer acquire after the bankruptcy is protected from creditors of the non filer who held a claim against the non filing spouse as of the date of the filing.
A creditor with a claim against the non filing spouse can only collect its debt from the separate property of the non filing spouse. In Texas, that separate property is comprised of assets acquired before marriage; assets acquired by gift during marriage; or assets acquired by inheritance.
Dana A. Ehrlich
Dana A. Ehrlich is a bankruptcy specialist who lives and works in San Angelo, Texas. He has lived in the ConchoValley and San Angelo, TomGreenCounty for many years. His practice is primarily consumer bankruptcy law and he is a board certified bankruptcy specialist for Chapter 7 and Chapter 13. He may be reached at 325-655-5351 or at email@example.com.