Bankruptcy is a complicated enough subject in your life if you are going through it. If you add divorce to the mix there are even more questions to be asked. Bankruptcy and divorce are tied together by the Bankruptcy Code.1
Joint Debt
Different difficult scenarios can arise depending on when you or your spouse declare bankruptcy. For example, if you dissolve your marriage and have joint credit card debt, it could be that the court mandates your spouse to pay that debt.2 However, if your spouse files for bankruptcy after divorce and both of your names are still on the debt then you are on the hook.3 In contrast, if you file for bankruptcy jointly before filing for a divorce, you could wipe out some or all of your debt together and have a clean slate.4
It may be better to file individually after property is divided through the divorce if you have more property than will be considered exempt in the bankruptcy.5 However, a joint filing is otherwise preferable.
The Automatic Stay
When you file for a Chapter 7 or Chapter 13 bankruptcy, your listed debts will be put on hold automatically for a certain period of time. 11 U.S.C. A� 362. This means that listed creditors who attempt to collect or recover debt from you will not be able to during this time. 11 U.S.C. A� 362.
If you file for bankruptcy before divorce, the automatic stay will not stop the divorce but may stall it.6 The automatic stay does not stop the court from going through other divorce related proceedings such as determining paternity, alimony, or child support, or collecting past due payments on property that is outside the bankruptcy estate.7
Discharge
When your bankruptcy is finished you receive a notice of discharge that shows your debts which qualify have been discharged. However, certain debts are not dischargeable, such as alimony. If you declare bankruptcy and get some of your debt discharged, this may leave you with more income to go towards alimony or child support.8 Filing bankruptcy before dissolving the marriage will make the situation more clear because you will know which debts have been discharged.9
Chapter 7
A Chapter 7 bankruptcy is a liquidation of assets bankruptcy. The court can collect past due family support from any wages or assets you get after your bankruptcy is filed.10 You cannot discharge divorce-related debts.11 Further, if you file jointly you have to include your combined income in the bankruptcy.12
Chapter 13
Chapter 13 bankruptcies involve repayment plans where you modify your debt load by coming up with a three to five year plan to pay back creditors. Once the automatic stay is lifted (when the payment plan is confirmed), all your property is subject to alimony and child support orders.13 It is possible to discharge divorce related debt in certain cases.14 However, since the Chapter 13 bankruptcy can take so long it may be better to file after the divorce is completed.15
If you are contemplating divorce and bankruptcy or are in the middle of either or both, it is best to contact an Arizona attorney who can advise on both areas of law.
[1] Mary A. Throne, Pension Awards In Divorce and Bankruptcy, 88 Columbia L. Rev. 194 (1988).
2 Rowley Chapman & Barney, Ltd., Arizona Bankruptcy or Divorce – Which Comes First?, jdsupra.com (July 25, 2013), http://www.jdsupra.com/legalnews/arizona-bankruptcy-or-divorce-which-co-36623/.
3 Id.
4 Id.
5 Baran Bulkat, Divorce & Bankruptcy: Which Comes First?, nolo.com, http://www.nolo.com/legal-encyclopedia/divorce-bankruptcy-which-comes-first.html (Nov. 3, 2014).
6 Rob Jennings, Can Bankruptcy Be Used to Stop Divorce Proceedings?, info.legalzoom.com, http://info.legalzoom.com/can-bankruptcy-used-stop-divorce-proceedings-25075.html (last visited Nov. 3, 2014).
7 Id.
8 Id.
9 Gregg R. Woodnick, Bankruptcy and Divorce, woodnicklaw.wordpress.com (Feb. 27, 2013), http://woodnicklaw.wordpress.com/2013/02/27/bankruptcy-and-divorce/.
10 Rob Jennings, supra note 6.
11 Id.
12 Baran Bulkat, supra note 5.
13 Rob Jennings, supra note 6.
14 Id.
15 Baran Bulkat, supra note 5.
