Understanding How Bankruptcy May Affect Your Divorce

couple having a fight over bills at home

Financial troubles are one of the top causes of divorce and marital discord. When debts outweigh assets and your monthly payments eat up most of your income, you and your spouse may need to resort to a bankruptcy to resolve your debts, even as you consider using divorce to dissolve your marriage. Understanding how bankruptcy may affect your divorce, and vice versa is important to making the right decisions, in the right order.

Shelly Ingram is a family law attorney, not a bankruptcy lawyer. If you are considering bankruptcy, it is important to speak to someone with experience in bankruptcy law about the effect your divorce may have on those proceedings.

Filing for Divorce and Bankruptcy at the Same Time Causes Problems

If financial problems have driven you into two lawyers’ offices, you may want to resolve the divorce and bankruptcy at the same time and just get it all out of the way at once. Unfortunately, federal bankruptcy laws may make that difficult. Every bankruptcy petition filed triggers an “automatic stay”. That puts a hold on any attempts to collect on your debts, which is often a relief. However, it may also prevent your Maryland divorce from resolving.

Unlike in other states, Maryland family law judges will not reassign debts from one spouse to another. Because those debts are not “at issue” in the divorce, the legal proceedings in your case can continue even while the automatic stay is in place. However, practically speaking, a pending bankruptcy action may prevent either spouse from refinancing property, assigning bank accounts, or taking other steps to divide the family’s assets. Even if you can get divorced while your bankruptcy is pending, you may not be able to do what it takes to put your judgment of absolute divorce into effect until the discharge order has been entered.

What Happens If You File for Joint Bankruptcy Before Divorce?

In many cases, the better option is to complete a joint bankruptcy first, before filing for divorce. By cooperating with one another through the bankruptcy process you can share the cost of the bankruptcy attorney and reduce the bankruptcy court fees. Depending on your circumstances, you may even be able to protect more of your property through bankruptcy exemptions as a married couple than as two single individuals. However, those details are best discussed with your bankruptcy attorney before filing either case.

Filing for joint bankruptcy before divorce can also simplify your divorce process. Because most of the family’s debts will be resolved or discharged in the bankruptcy, it may be easier to negotiate a settlement on the property issues in your divorce.

When It Makes Sense to File for Divorce First

The type of bankruptcy you choose could also affect the order of the cases. While a Chapter 7 bankruptcy is resolved quickly (usually in a matter of months), a Chapter 13 bankruptcy payment plan extends for 3 to 5 years. During that time, the petitioners agree not to take on any new debt without court consent. That may include hiring a divorce lawyer or taking out a new mortgage to buy out your spouse’s equity in the marital home. Also, having a bankruptcy on your credit history can affect your ability to obtain financing. If you believe you will need to refinance as part of your divorce settlement, or if you are worried about staying married while the bankruptcy is pending it may be better to wait to file until after the divorce is finished.

What Happens if One Spouse Declares Bankruptcy After Divorce?

If bankruptcy is in either spouse’s future it is important to know that when you are negotiating the terms of your divorce. Under Maryland law, the name on the debt agreement (mortgage, credit card application, or car loan) is the key to who will be responsible for the debt after the divorce. Even if a credit card was used for day-to-day family expenses, if it is only in one spouse’s name, that spouse will need to pay off the balance or get the debt discharged in bankruptcy.

However, where there are joint debts (where both spouses’ names appear on the debt agreement), your absolute judgment of divorce will need to be very clear about what will happen to those debts. If one spouse declares bankruptcy after divorce and discharges his or her liability on those debts, the creditors may try to collect the balance from the other spouse. Unless your absolute judgment of divorce includes protections against this, you may end up paying more than your fair share of the debt.

It may sound backwards, but if one spouse is planning on declaring bankruptcy, it may make sense for that spouse to assume as much of the debt as possible, so that it can be discharged by the bankruptcy court. However, once again, that strategy should be openly discussed with an experienced bankruptcy attorney before any judgment is entered to avoid unintended consequences.

Will Bankruptcy Affect Your Child Support?

No matter when the bankruptcy is filed, it will not affect your child support -- either the monthly payments or the accumulated debt for past missed payments. Child support is nondischargeable in bankruptcy, so the paying parent can’t avoid supporting his or her children just by filing for bankruptcy. Also, family support obligations are given top priority in the bankruptcy process. So the receiving parent will continue to receive support, even while other creditors get less than their full payments.

When money trouble is pushing you closer to divorce and bankruptcy, you need a lawyer who understands how the two will interact. At the Law Office of Shelly M. Ingram, our divorce lawyers will work with you and your bankruptcy attorney to plan the best approach for your family. If creditors come calling after the divorce is final, we can help you enforce your judgment to make sure you don’t pay more than your equitable share. Contact us today to schedule a consultation with an attorney.