Bankruptcy and Divorce

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Although the economy is showing signs of recovery, chances are you’ve experienced some degree of hardship in the last few years – especially if you have gone through or are going through – a divorce. Very few come through the divorce process economically unscathed, so rest assured that you’re in good company. But if the comfort of being among others in financial distress doesn’t help (and why would it, really?), I’ve put together some practical information about bankruptcy during divorce that you could use as a guide.

For those of us who’ve undergone the painful procedure of separation and divorce, the splitting up of the estate is one of the parts that hurts us the most. Financial issues are one of the main causes of tension in a marriage, often being the catalyst that divides a couple in the first place. In an ironic twist, oftentimes separation and divorce exacerbate those same issues. This is why so many consider filing for bankruptcy.

Bankruptcy is tricky territory and one that you really should not consider without consulting an attorney who specializes in bankruptcy, not divorce. Once you file for bankruptcy, you will be granted an automatic stay. A stay will freeze most of the debts that you are due to pay– but not everything. This is important. An automatic stay does NOT apply to domestic support obligations (child support, spousal support, spousal maintenance, alimony), paternity, divorce, or child custody. But what it will do for you is to suspend the equitable distribution of your property, giving you some much needed breathing room.

However, to use bankruptcy as a tool to forestall divorce settlements or as a negotiation tactic can backfire without the proper legal advice. Your property could end up as part of the bankruptcy estate and divided in a way that does more harm than good. With the coordination of a bankruptcy attorney and a divorce attorney, they can help you devise the financial plan that works to serve an end that you are the most comfortable with. They will be able to distinguish real versus personal property, an important distinction in determining what will become part of the bankruptcy estate and what won’t.

For example, the house that you lived in together before your divorce or separation is most likely your biggest financial asset. In many cases, during a separation, one of you has moved out of the home while you work out the legal proceedings. Don’t make the mistake of believing that moving out of the residence gives you any lesser claim on the equity of the house. The U.S. Bankruptcy Court recognizes that even if it is no longer your primary residence, you are still considered as having constructive possession of the property.

The truth is that bankruptcy is not going to absolve you of paying out after a divorce. If you are in financial debt because you owe alimony payments and child support, bankruptcy won’t affect those payments. However, if you’ve gotten underwater in credit card bills and other types of debt and need relief in order to make your court ordered support payments, bankruptcy could be a viable option to help you through this tough time.