What is the Impact of Filing for Bankruptcy During a Divorce?

One of the unfortunate byproducts of divorce is the financial hardship that can affect one or both parties. You may fear that creditors will pursue you for debts incurred by your former spouse. You may have a house that you can’t afford, but that you can’t sell either. A bankruptcy filing may seem like the best way to protect yourself. Here are some issues to consider regarding the interrelationship of bankruptcy and divorce:

  • A bankruptcy petition will necessarily lead to delays—whether you or your ex-spouse file for bankruptcy protection, an automatic stay will go into effect. In addition to prohibiting your creditors from taking action to collect a debt from you, it will also delay the distribution of marital property. Even if you agree on the division of debts and assets, property won’t be permanently transferred until the bankruptcy proceeding is finalized. This can include retirement plan assets, as well as the proceeds from the sale of your house.
  • If one party files for bankruptcy, both may need/want to file—If your ex-spouse files for bankruptcy protection, and you don’t, any debts discharged will only be discharged with respect to your former spouse. You would remain liable for all joint debt..
  • A bankruptcy filing could increase child support or spousal support obligations—If you have significant debts discharged in a bankruptcy proceeding, you could lower your debt-to-income ratio to the extent that the court perceives that you can pay more support. The opposite may be true if you receive support. Discharging your debts may reduce your need for spousal support.

One additional caveat: alimony and child support obligations are not dischargeable in a bankruptcy proceeding. Whether you are the potential payor or the potential recipient, you want to take this into consideration and plan appropriately, which means that you need to speak with an attorney who specializes in these matters.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-547-6500.

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