What Happens If Your Spouse Files for Bankruptcy During Divorce?

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Filing for bankruptcy during divorce results in an automatic stay being placed on property division.

What is an automatic stay?

An automatic stay is a court order that stops creditors from collecting debt during a bankruptcy proceeding. In the case of divorce, the stay also prevents the court from making decisions about property division until the bankruptcy case is resolved. When you file for bankruptcy, most if not all of your property becomes property under the bankruptcy estate.

When you or your spouse files for bankruptcy during divorce, it typically delays and complicates your divorce case.

Does it matter what type of bankruptcy you file?

Yes, it matters considerably. In a Chapter 7 bankruptcy, the court appoints a bankruptcy trustee to handle the bankruptcy. The trustee must decide which assets belong to the bankruptcy estate. Bankruptcy law gives the trustee the right to sell property (that is not exempt under bankruptcy law) to pay off debts. If you and your spouse jointly own property, the trustee may be able to sell the whole asset.

What if the debt was your spouse’s debt and not yours?

In this situation, the trustee would pay you the value of your interest from the money received through the sale of the asset.

Chapter 7 bankruptcies wrap up much more quickly than Chapter 13 bankruptcies — generally in a matter of months as opposed to years.

What happens in a Chapter 13 bankruptcy?

Chapter 13 involves a repayment plan, and the trustee decides how much money you have to pay your creditors. This bankruptcy will take either three or five years to complete. The bankruptcy trustee still has to determine the value of your property because its value affects how much money you’ll have to pay to unsecured creditors. When your spouse files for a Chapter 13, you or your spouse would need to get permission from the bankruptcy court to continue dividing property in the divorce case.

For a relatively fast divorce, it’s better to file for bankruptcy before or after divorce.

Considering bankruptcy during divorce? Discuss it with a divorce lawyer.

If you or your spouse is considering bankruptcy, discuss this concern with one of our attorneys at C.E. Borman & Associates. We work with clients to make their divorces go as smoothly as possible.

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