Bankruptcy & Divorce

Under federal law, a bankruptcy filing by a debtor will “stay” (halt) legal proceedings against the debtor for the collection of certain debts. This is called the Automatic Stay. The Automatic Stay applies to the division of property in a divorce case. The non-debtor spouse may not attempt to obtain possession of the debtor’s property or attempt to collect a claim against the debtor’s property. The divorce court, therefore, is precluded from ordering that the debtor’s property be transferred to the non-debtor spouse in the divorce case unless the non-debtor spouse obtains from the bankruptcy court a Relief from the Automatic Stay.

Unlike the bankruptcy’s potential effect on the division of property in a divorce, the commencement or continuation of an action to establish paternity or to establish or modify an order for maintenance or child support (called “domestic support obligations”) are exempted from the Automatic Stay and cannot be discharged in bankruptcy. A domestic support obligation is considered a priority and will be paid first out of any proceeds of the bankruptcy estate, before other non-property debts.

What constitutes a “domestic support obligation” can sometimes be tricky. For example, an order for the debtor spouse to pay the non-debtor spouse’s mortgage or credit card debt may be considered a “domestic support obligation” by the court.

A non-debtor spouse may obtain some measure of protection against the adverse effects of the debtor spouse’s bankruptcy with proper foresight and planning, including the insertion of language in the separation agreement or dissolution order designed to protect the non-debtor spouse in the event the debtor spouse files for bankruptcy. Conversely, the debtor spouse may attempt to maximize the benefits of the bankruptcy by seeking the insertion of language in the separation agreement or dissolution order designed to maximize the dischargeability of marital debts.