Divorce and bankruptcy do not always have a causal relationship with each other, but they often occur together. In this article, we cover how bankruptcy and divorce laws work. Specifically, we address the following topics:
If you are considering bankruptcy amidst a divorce, please call Stone Rose Law at (480) 739-2448 to speak with a compassionate and experienced bankruptcy attorney.
The bankruptcy automatic stay will shield your community debts from creditor collection efforts during the process of your bankruptcy. The automatic stay will end when your case is discharged or dismissed. Your community property debts will only be discharged in your name.
The bankruptcy automatic stay will not stop your divorce from going forward. It will, however, stop divorce proceedings from dividing property that belongs to the bankruptcy estate until the bankruptcy court allows it. Any sale, division, or transfer of non-exempt property in the divorce can be set aside by the bankruptcy trustee if the divorce court does not obtain a judicial lift stay order first.
The automatic stay will not stop criminal proceedings. For example, if a spouse fails to pay spousal support or a parent fails to pay child support, then a related criminal contempt proceeding to hold that person accountable can continue while bankruptcy is pending.
Nor will the automatic stay stop proceedings to establish or modify child support or spousal support orders. Domestic court proceedings that do not directly affect bankruptcy estate assets and debts, like child custody or visitation, will also continue.
Some other specific examples of family law-related activities that the automatic stay will not affect include:
Whether you file for bankruptcy as an individual or together with your spouse depends in part on the nature of the underlying debts you seek to discharge.
Because Arizona is a community property state, debts you incur during the marriage are community debts that both spouses are potentially liable to repay, no matter which spouse incurs the obligation. However, pre-existing debts you bring into the marriage remain your separate responsibility to repay.
It is not required under federal bankruptcy law for married couples to file for bankruptcy jointly.
One reason why divorcing married couples file jointly for bankruptcy is when a large amount of community debt exists, and both spouses want to reduce the amount of debt to be apportioned as part of the divorce process. Filing jointly can be more efficient in such a situation.
Situations in which only one spouse in a divorce might file for bankruptcy include:
After your community property debt has been discharged, community property creditors can pursue your spouse for the community debts discharged in your bankruptcy if the discharge was entered after the divorce decree was entered.
If you file for bankruptcy as an individual, it should not appear on your spouse’s credit report. If you file for Chapter 13 bankruptcy, the bankruptcy will remain on your credit report for 7 years. A Chapter 7 bankruptcy will remain on your credit report for 10 years.
Filing separately under Chapter 7 bankruptcy proceedings can be practical when you have separate unsecured debts. Chapter 7 can see these debts discharged quickly, usually in four to six months, and it will have no effect on your spouse.
A possible challenge to filing separately for Chapter 7, especially for dual-earner households, is that when qualifying to do so, your spouse’s income is still included when calculating whether your income for the past six months is less than the median income for Arizona residents, or whether you can qualify under the bankruptcy means test.
Chapter 7 means test income is based on your household size. This means that your joint income can be too high to pass the Chapter 7 means test even if each spouse’s income is low enough to qualify independently. In this case, it may be best to wait until after the divorce before filing for Chapter 7 bankruptcy.
When your disposable monthly income is within a certain range, or even negative, you may be able to file for Chapter 7 bankruptcy despite earning more than the Arizona median income. For example, spousal maintenance and child support obligations can be expenses that can reduce your disposable monthly income to qualify for Chapter 7 bankruptcy.
Filing separately for Chapter 13 bankruptcy can be more complicated in divorce situations, mainly because of the longer time needed to complete a Chapter 13 debt repayment plan. This plan lasts for at least three and up to five years.
Any joint assets you have with your spouse will be subject to the bankruptcy automatic stay protection. This will cover most, if not all your community assets acquired during the marriage.
Filing separately under Chapter 13 can cause problems calculating your disposable monthly income in a dual-earner household, because a Chapter 13 payment plan factors in all your household income and not just your own. Your spouse may not want to agree to all or almost all of your disposable household income being paid into the payment plan, especially if only your debts are being discharged under the plan.
When to file for bankruptcy during divorce proceedings depends on your circumstances.
Another consideration is whether you use Chapter 7 or Chapter 13 bankruptcy.
Bankruptcy will freeze your assets, so you cannot finalize your divorce until the bankruptcy process is complete. The bankruptcy court will exercise jurisdiction over your property until the bankruptcy case is closed. Any remaining distribution of property will then return to the jurisdiction of the divorce court.
Here are some specific considerations that can influence which bankruptcy chapter to use, and when:
There is no waiting period for filing for bankruptcy after you complete your divorce. If you file for bankruptcy within six years after being divorced, though, you will have to provide divorce documentation for your bankruptcy.
Jointly discharging your community marital debts through bankruptcy can make property division easier in a divorce, as long as you have enough exemptions to protect the assets you want to keep from being liquidated in a Chapter 7 bankruptcy.
If you cannot double your exemptions through marriage, it might be better to file for bankruptcy individually after the community property has been divided through the divorce.
Generally, the more debts you can pay off through divorce proceedings, the better. This is because the fewer financial connections you have with your ex-spouse, the less likely it is that any financial problems your ex may experience post-divorce will have an effect on your financial circumstances and your credit rating.
Under ARS 25-211, community property is property and assets that you and your spouse acquire during your marriage, except for what you receive as a gift or inheritance, or property one of you acquires after filing the divorce petition.
By comparison, separate debts are those that each spouse incurred before the marriage. Separate debt remains the responsibility of the spouse who incurred it.
You cannot use community property to acquire separate property after filing for an annulment, divorce, or separation. Filing for divorce will not change the legal status of any shared bank accounts, property, real estate, or retirement and investment accounts.
Most of the time, it does not matter which spouse acquired community debt during the marriage. Examples of divorce debts one spouse might take on that can become community debts include:
Bankruptcy filing fees are the same for joint and individual filings. So, filing a joint bankruptcy with your spouse before a divorce can save some legal fees. Filing for bankruptcy before a divorce can also simplify the issues regarding debt and property division and lower divorce costs.
Also, if you decide to hire a bankruptcy attorney, then your bankruptcy legal fees will be less for a joint bankruptcy than if each of you filed separately.
You should inform your bankruptcy attorney about your upcoming divorce because representing you both could present a conflict of interest.
Too many people in Arizona delay seeking advice from an experienced bankruptcy attorney because they fear a complicated bankruptcy process and are intimidated by the legal system. This sense of hesitation can be even worse if you and your spouse are considering divorce at the same time you are going through financial stress because of individual debts and combined debts.
Although we are not family law attorneys, our experienced Arizona bankruptcy lawyers can help you navigate the debt relief process. We can explain how bankruptcy laws intersect with Arizona community property and community debt laws, and specific Arizona bankruptcy law exemptions that will protect many of your assets.
To learn more about how your unique debt situation can affect your marriage assets and debts and how bankruptcy can help you get a fresh financial start, we encourage you to call Stone Rose Law at (480) 739-2448 or use our contact form.
