Don’t Panic: Reasons Bankruptcy May Not Derail Your Divorce
Written by: Megan Dell
[Thanks to Wendi Freeman, who is a bankruptcy attorney with Freeman | Wine, LLC, for helping write ‘Don’t Panic: Reasons Bankruptcy May Not Derail Your Divorce’]
The process of divorce is overwhelming, and when your spouse files for protection in bankruptcy court, you have a new reason to worry. Read on to learn why you don’t need to panic and reasons bankruptcy may not derail your divorce in Family Court.
What is Bankruptcy?
Bankruptcy is a process through which debtors can be relieved of, or modify repayment of, many of their debts. It is a viable option to conserve income for basic living expenses. The Bankruptcy Code provides for six types of bankruptcy, but only two of them are commonly used by individual debtors who need relief.
Chapter 7 bankruptcy cases generally discharge unsecured debts, like credit cards and medical bills, completely. For secured debts, the debtor will have the option to retain and pay the debt secured by the asset (reaffirm) or give up ownership of the associated asset (surrender). The bankruptcy will stay on a person’s credit report for seven years. This may make it more difficult to borrow money.
Chapter 13 bankruptcy cases allow for reorganization of debts by establishing a more affordable repayment plan, which usually lasts three to five years; once the plan is finished, the remainder of the unsecured debts are discharged.
There are reasons bankruptcy may not derail your divorce. Let find out what they are, next.
Married Couples Do Not Have to File for Bankruptcy Together
People often believe both spouses must file for bankruptcy together, but that isn’t true. Only one spouse can file for bankruptcy, and often, doing so provides more flexible options for the family’s financial future. If only one spouse files for bankruptcy, then the other spouse may still be able to maintain a good credit score.
However, if one spouse files for bankruptcy while the couple continues living together, then the Bankruptcy Court will consider both spouse’s incomes when calculating the household’s ability to pay the filer’s debts.
Will My Credit Be Affected if My Spouse Files for Bankruptcy?
It is common for spouses to incur joint and several liability on debts. Many people who have joint debt worry their credit will be affected if their spouse files for bankruptcy. Often, the non-filing spouse can maintain good credit. If both spouses are jointly and severally liable for a specific debt, the non-filing spouse can pay the entire debt or attempt to work out a payment arrangement with the creditor. A payment of a debt for less than owed may still affect a credit score and the reduced payment will be reflected on the credit report.
How is a South Carolina Divorce Affected by Bankruptcy?
The effect of bankruptcy on a South Carolina divorce case may depend on which case is filed, and completed, first. If the bankruptcy case is filed first, and resolved, then division of a couple’s marital debts may be more straightforward in a subsequent divorce case. Sometimes, filing for bankruptcy before a divorce can be the best option for allowing spouses to restart their financial lives.
Alternatively, if the divorce case is filed and then one spouse files for bankruptcy, then the division of assets and debts in the divorce action is automatically stayed – at least temporarily – until the bankruptcy court lifts the stay. However, disputes over paternity, custody, and visitation are not affected when one party files for bankruptcy, but a Family Court may still want an order from the Bankruptcy Court to ensure compliance with the automatic stay.
In some cases, someone may file for bankruptcy protection in an effort to avoid paying child support or alimony obligations resulting from their divorce. Collection efforts, such as petitions for contempt for failure to pay support obligations, are also paused by the automatic stay when the payor files for bankruptcy.
Having good legal advice about the automatic stay provided by bankruptcy law is very important: if you violate the automatic stay, then you can be sued.
Bankruptcy Protections for Spouses in Family Law
Domestic support obligations cannot be discharged in bankruptcy. Pursuant to Section 101(14)(c) of the Bankruptcy Code, a domestic support obligation (sometimes referred to as a “DSO”) is a debt owed to the child of the debtor or to the former spouse of the debtor, which can be in the nature of alimony, maintenance, support (including assistance provided by a governmental unit), or other amounts due from one former spouse to the other.
When filing for bankruptcy, pensions and certain types of retirement accounts are assets that cannot be liquidated to pay creditors. This protects both the person filing for bankruptcy and their spouse.
Ways to Protect Yourself In Case Your Spouse Files for Bankruptcy
The best way to protect yourself from the possibility of your spouse or former spouse filing for bankruptcy is to have advice from an experienced attorney. By paying specific attention to the possibility of a bankruptcy filing, your divorce attorney can help secure your financial future.