Bankruptcy Blues

Divorce often leaves people in a financial bind, whether it’s going from a two income household down to one, or one spouse being forced to work after being a stay at home mom or dad.

At the start of a divorce, I typically advise clients to pull their credit reports – you can do so for free (yes, really, no gimmicks or anything) at www.annualcreditreport.com, which allows you one free report per year from each of the three reporting agencies – Experian, TransUnion and Equifax.  This can lead to an unfortunate enlightening about the financial status of their marriage – often people have no idea that their credit card debt was so high, and the wife had no clue she was on the loan to the useless fishing boat he just had to have (who wants to stab worms and pull hooks out of slimy, scaly fish anyways?).

When divorcing parties have all debt and no assets, bankruptcy becomes high on the list of things to talk about with your attorney.  Bankruptcy law is a very specialized area and individuals should seek expertise counsel to advise them as to their particular situation.  At times it may be more advantageous for a person to file bankruptcy with their spouse instead of individually, or it could be better to wait until the divorce is finalized as opposed to doing so while the divorce is ongoing.  In some cases, a person may not even qualify to file bankruptcy, so the option may be completely off the table.  Your family law attorney likely knows several bankruptcy lawyers that can assist you in making the right decision.

If you do decide to file bankruptcy during your divorce proceedings, doing so will keep you married longer.  As part of the divorce, your marital assets and property are divided between the two of you, and that division is then set forth in your final judgment.  However, when either one of you file bankruptcy, an automatic stay is triggered which stalls the divorce action as a court cannot divide any property while the bankruptcy is ongoing.  Once the bankruptcy is complete, the divorce starts chugging along again and the property can be divided.  Parties must still stay on top of their divorce matter even if a bankruptcy is filed, because issues such as custody and parenting time can be addressed and potential settlements can be discussed as well, which will finalize the case much quicker once the bankruptcy proceedings are resolved.

Certain items cannot be discharged in bankruptcy, specifically support obligation debt and property settlement debt that is owed to one’s spouse, ex or child.  If a judgment includes a provision about property settlement, it is still nondischargeable but will not be as high up the totem pole as support obligations; therefore it’s important to distinguish between the two in a judgment.

It is not uncommon for one spouse to take control of the marital finances, leaving the other relatively in the dark about the parties’ savings, debts and expenses.  Divorce is not the best time to find out about these financial indiscretions, and it’s best to take an active role from the start – you don’t have to take over the dreaded obligation of balancing the checkbook, but look at all the bank statements and bills when they arrive (by mail or electronically).  After all, you’re already at an attorney’s office – at least try to save yourself from more disappointment.