Divorce & Bankruptcy

Financial problems are a common cause of marital problems leading to divorce. Divorce can also be a financial strain on each spouse. Significant financial losses can lead to bankruptcy, which can impact both spouses. If bankruptcy is a consideration for one or both spouses in a divorce, determining the timing and the process of divorce and bankruptcy can be key. 

Generally, it is better to file for bankruptcy before a divorce or after a divorce. Filing for bankruptcy during divorce can make property division more complicated, make each spouse's living situation less predictable, and delay both the bankruptcy and the divorce. Talk to your experienced North Carolina family law attorney about your options in a divorce if you may file for bankruptcy. 

Financial Issues Before a Divorce

Money is the most common are for disputes among married couples. Financial troubles can lead to stress, which can put a strain on the couple's marriage, resulting in a spouse filing for divorce. Financial issues for married couples can include: 

Filing for Bankruptcy Protection

Most individuals have the option of Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy is wider-reaching, simpler, and offers broader protection for most individuals who qualify. It can offer total forgiveness for most debts, with some exceptions (like student loans). Chapter 13 bankruptcy is a longer process but may be preferable for individuals, depending on their financial situation. Talk to your attorney about filing for bankruptcy, your options, and how the bankruptcy may affect your divorce. 

Whether to file for bankruptcy before, during, or after a divorce may depend on your debts. Debts, like assets, can generally be classified as joint or separate. Joint debts include debts accrued during the marriage, such as a home mortgage, joint credit card accounts, child-related expenses, and joint loans. Individual debts may include debts accrued before the marriage, such as student loans. 

If the couple has significant joint debts, they may consider a joint bankruptcy filing. This could help protect larger joint assets, like a home with a mortgage under both spouses. If the couple divorces and only one spouse gets the house, the equity may be too much for a single bankruptcy filing and it may not be protected. 

It is also generally less expensive to file joint bankruptcy instead of two separate bankruptcy filings after divorce. Some couples may try and get divorced first as a way to protect one spouse from creditors. However, even after a divorce, creditors may still go after property that would not be exempt. 

Individual Bankruptcy During Divorce

If a spouse files for individual bankruptcy during the divorce, the equitable distribution of the marriage may be stayed, pending the bankruptcy. All the individual's property becomes part of the bankruptcy estate, which may include prohibiting action to sell or divide jointly held property, including marital property.

However, the bankruptcy court may permit the court to determine property division, to find how much interest each spouse has in marital property. Separate property owned by the non-bankruptcy filing spouse will generally stay with that spouse. 

Filing for Bankruptcy After Divorce

In a difficult marriage, it may be impossible for the couple to stay together, even if it would be financially beneficial to file a joint divorce. One aspect of North Carolina divorce is that the couple has to spend one year living separately and apart before divorce can be granted. With foresight, this will allow the couple to take advantage of a joint bankruptcy without having to live together over the year-long period. 

Filing for bankruptcy after a divorce may have no impact on the non-filing spouse. However, significant changes in the filing spouse's financial situation could be the basis for a future post-judgment modification. After a bankruptcy, the bankrupt spouse may have a basis to reduce future child support payments, based on a “substantial and material change in circumstances.”

Bankruptcy and Child Custody or Child Support

Generally, a bankruptcy filing will not impact a child custody dispute or determination of child support. Child custody proceedings will generally continue, first through mediation, then through the courts if mediation is not successful. However, the financial issues surrounding a bankruptcy could impact the way child custody or visitation decisions are made. 

The primary consideration in a child custody decision involves what is in the best interest of the child. Some financial factors that may be taken into consideration include, the parent's ability to adequately care for the child and provide a stable home environment. 

Child support has special protections in bankruptcy filings. Generally, if you owe back child support, a bankruptcy will not cancel that debt. Child support debts also get priority treatment over other debts. A bankruptcy stay to protect the filer from creditors does not apply to court proceedings to establish child support. Additionally, the stay generally does not apply to collection of child support or income withholdings. 

Alimony After a Divorce

If an individual owes post-separation support or alimony to their former spouse, they may be tempted to eliminate that expense through filing for bankruptcy. Bankruptcy protections will generally not erase past-due alimony. 

Under the U.S. Bankruptcy Code Section 523(a)(5), discharge from individual debt does not apply to domestic support obligations, that meet the following requirements: 

  • The debt is in the nature of alimony, maintenance, or support; 
  • Owed to a former spouse; and
  • Established by a separation agreement, divorce decree, settlement agreement, or court order.

North Carolina Divorce Attorneys

If you have any questions about filing for divorce before a divorce, or waiting until after a divorce to file for bankruptcy, contact the Caulder & Valentine Law Firm, PLLC. Contact us online or by phone at 704-470-2440 today for a consultation.