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When Divorce And Financial Distress Intersect

Family law and bankruptcy are both incredibly stressful times for people. Often one also leads to the other. Spouses split up, can’t pay the family debts, or lose jobs, credit problems, bankruptcy then family issues erupt. Either way, it is a problem and one requiring unique approaches for an acceptable resolution.

How Bankruptcy Can Affect Family Issues

For those divorcing or divorced, the bankruptcy issues fall into three categories:

  1. Child and/or Spousal Support: bankruptcy discharge, payment of support and the automatic stay against actions to collect support
  2. Property settlement: what happens to debts between spouses (e.g. discharge)
  3. Liability to others: who is liable for the debts during and after divorce

Bankruptcy Filed By Only One Spouse

California family law looks at debts differently than federal bankruptcy law.

Where there are nonexempt assets, a bankruptcy filing by one spouse pulls all the community property into the bankruptcy estate and assures that the available assets are used to pay debts now. Most Chapter 7 cases, though, are no-asset cases in which no distribution is paid to creditors because all of the assets are exempt.

The filing of a bankruptcy brings into the bankruptcy estate all property of the debtor and all community property of the debtor and his spouse; and upon entry of a discharge, relieves the debtor of personal liability for all dischargeable debts.

The family court cannot assign marital debts to the debtor after he has received a discharge and cannot make orders dividing the property of the debtor while the property is property of the estate. The family court can divide the property that the debtor exempts; after the exemption is allowed, that exempt property is no longer property of the estate.

The 2005 amendments to the Bankruptcy Code made debts arising in a divorce non dischargeable in Chapter 7, without any action required by the non-debtor spouse, including non-support obligations. (See 11USC 523(a)15). As a result, debts to even up the distribution of marital assets or obligations to hold the other spouse harmless from existing debts survive a Chapter 7 discharge. These obligations remain dischargeable in Chapter 13 so often a Chapter 13 filing is preferred over a 7. That leads to some other issues, such as the “plan” and what assets you have, but you can discuss this with your attorney who files the bankruptcy petition.

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Discuss Your Situation With Counsel That Cares

Our attorneys have been helping individuals hit the reset button on their finances and families move into new chapters of their lives for more than 30 years. Call Simkin & Associates in Los Angeles at 310-788-9089 or contact us online to tell us more about your family law and bankruptcy concerns.