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Bankruptcy and Divorce

Bankruptcy and Divorce

When talking about the tie-in between bankruptcy and divorce, one first needs to separate the two primary aspects of interplay. The first one is whether the debtor is still married and interested in filing bankruptcy with her soon-to-be divorced spouse, while the second scenario is the debtor who is already divorced and wants to know how to handle a debt owed.

Taking the first scenario, the debtor who is currently married and wants to file bankruptcy with a spouse, should not consider filing chapter 13 with the soon-to-be ex-spouse. A Chapter 13 plan lasts 36 to 60 months and is too long for the debtor to be in a bankruptcy with a soon-to-be ex-spouse, who presumably has competing interests. There is too much of a conflict of interest to file Chapter 13 bankruptcy with the soon-to-be ex-spouse.

Chapter 7 bankruptcy could be potentially have no conflict of interest, as there is no repayment plan and the case is much shorter, maybe even as little as four months. Therefore, the debtor and the soon-to-be ex-spouse, could theoretically have no competing interests, and such a short timeframe, that if there are no potential conflicts of interest, they might want to file together. They would save on the court filing fees, and most likely the attorney fees, should they file together.

The next scenario to consider is one where the debtor is already divorced prior to filing bankruptcy. The debtor’s support obligations to the debtor to the debtor’s ex-spouse are non dischargeable in either Chapter 7 or Chapter 13 Bankruptcy. Since Chapter 7 is not a repayment chapter, the debtor just continues to owe support debts after the bankruptcy just like it did before.

However, in Chapter 13, if the debtor has any arrears owed to the ex-spouse before the bankruptcy is filed, the debtor must pay off those arrears in full by the time the bankruptcy is over. The debtor has to do that to get its plan confirmed and to get discharged. The debtor also has to continue its ongoing monthly payment as well, so by the end of the bankruptcy it will be current on all of its obligations to its ex-spouse.

Depending on the jurisdiction, in a Chapter 13 the debtor most likely can pay the property settlement debt to the ex-spouse as an unsecured creditor, as opposed to a priority creditor. What this means is the debtor pays that debt just like all the other unsecured debt, which may be anywhere from 0 to 100 cents on the dollar. So in this scenario, since it’s not a support debt that the debtor has to pay at 100%, the debtor might wind up paying the support obligation at considerably less than 100%.

Finally, it is important to note that if the debtor has a support obligation to an ex-spouse, it is nondischargeable in either chapter. However, the debtor needs to be aware that it might have indemnified the ex-spouse on a joint debt during the divorce decree, particularly on a joint credit card. In that scenario, while the debtor discharges its debt directly to the credit card company, who therefore cannot pursue the debtor directly, the debtor does still have an obligation to the ex-spouse, which is nondischargeable. So while the debtor doesn’t have to pay the creditor directly the debtor, the obligation to pay the creditor on behalf of the ex-spouse remains.

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