Reviewed by John E. Clancy, ESQ.
Key Takeaways
- A spouse’s bankruptcy does not pause the whole divorce; under 11 U.S.C. Section 362(b)(2), custody, parenting time, and support matters continue while the estate-property division waits.
- Alimony and child support can never be discharged; property settlements cannot be discharged in Chapter 7 but sometimes can in Chapter 13.
Filing for bankruptcy can be an incredibly stressful process. In addition, a divorce can be a stressful and emotional upheaval. If these two things occur at the same time, you may feel completely overwhelmed. These feelings are normal. It is important to know that filing for bankruptcy during a divorce is something that occurs, and you are not alone. That being said, bankruptcy can make a divorce much more complicated, so it is important to know what to do in the event that your spouse files for bankruptcy during your divorce, and the ways in which you may be affected. Read on to learn more about bankruptcy during a New Jersey divorce.
Why Bankruptcy Complicates Divorce Proceedings
Bankruptcy and divorce are handled in two different court systems: bankruptcy is a federal matter, while a Morris County divorce proceeds through the Superior Court’s Family Division. Even though they are separate proceedings, they overlap in ways that can create serious complications.
When you file for divorce, the primary focus will remain on:
- Equitable distribution of marital assets
- Alimony and child support obligations
- Full financial disclosure
Bankruptcy, on the other hand, centers on:
- The discharge of eligible debts
- Protecting creditors
- Debt relief for the filer
Unfortunately, when a spouse files for bankruptcy during a divorce, court timelines may be disrupted, financial outcomes can change suddenly, and conflicts over which court controls what can arise.
What Happens When Bankruptcy Is Filed During a Pending Divorce?
When someone files for bankruptcy, an automatic stay takes effect immediately. In general, this stay stops collection efforts and halts lawsuits and enforcement actions related to debt.
It’s important to understand that the automatic stay does not pause the entire divorce process. In fact, federal law exempts most family court matters from the automatic stay. In accordance with 11 U.S.C. Section 362(b)(2), the following matters can continue even after bankruptcy has been filed:
- The divorce itself (dissolving the marriage)
- Child custody and parenting time
- Establishing or modifying child support and alimony
- Establishing paternity and domestic violence proceedings
- Collecting domestic support obligations from property that is not part of the bankruptcy estate
The limit is more narrow than it might seem. The stay generally only halts the division of property that has become part of the bankruptcy estate. Essentially, this means that your divorce can move forward, but the equitable distribution process of bankruptcy estate property typically has to wait.
How the Automatic Stay Can Affect You as the Non-Filing Spouse
When your spouse files for bankruptcy, you may assume it will not impact you, but that is not the case. Because the stay pauses the division of estate property, you may temporarily be unable to:
- Finalize the equitable distribution of marital property
- Enforce certain financial orders against estate property
You may also find yourself exposed to shared marital debts. If you and your spouse both signed for a debt, such as a joint car loan or credit card, your spouse’s discharge does not erase your obligation. The creditor can pursue you for the full balance, which can affect your credit. The stay can also cause delays that prolong the financial uncertainty of your divorce.
Which Divorce Debts Can and Cannot Be Discharged
Not all divorce-related debts are treated the same in bankruptcy, and the distinction is one of the most important things to understand.
Domestic Support Obligations Are Never Discharged
Under 11 U.S.C. Section 523(a)(5), domestic support obligations, including alimony and child support, are not eligible for discharge during any bankruptcy proceeding. As such, these expenses will remain during the filing and are fully enforceable.
Property Settlements Depend on the Chapter
It’s important to understand that obligations arising from dividing property, including equalization payments or an agreement to pay a portion of marital debts, are handled differently depending on the type of bankruptcy filed.
Under 11 U.S.C. Section 523(a)(15), these property settlement obligations are not eligible for discharge during Chapter 7, but may be discharged under certain circumstances in a Chapter 13 case.
Because of this, the chapter you choose to file under, not simply whether the divorce is finalized, often determines if a property settlement obligation survives.
Timing of Bankruptcy in Relation to Divorce
The timing of a bankruptcy filing has a considerable impact on how these matters proceed. If bankruptcy is filed before the divorce is finalized, the division of marital assets may be delayed while the bankruptcy estate is sorted out, and certain property-related obligations may be affected. If bankruptcy is filed after the divorce is finalized, support obligations remain enforceable, while the treatment of property settlement debts still depends on the chapter filed.
Because of the impacts on the timing of the process, it is generally not ideal for a spouse to pursue bankruptcy in the middle of the divorce. Depending on the circumstances, couples may decide to file jointly before the divorce, or wait until the divorce is over to begin this process. Working with an attorney can help you determine the best order for your circumstances.
Which Court Has Authority?
Because two courts are involved, the United States Bankruptcy Court, District of New Jersey, and the Superior Court Family Division, authority is divided. The bankruptcy court handles the dischargeability of debts and enforcement of the automatic stay. The divorce court controls child custody, parenting time, and the determination of support obligations. The two courts can also coordinate, and the family court or a party can ask the bankruptcy court for relief from the stay so the divorce can move forward.
Contact an Experienced Morris County Divorce Attorney Today
If you discover that your spouse has filed for bankruptcy during your divorce, it’s important to understand that this process can impact you. Obtaining competent legal representation with Townsend, Tomaio, Newmark & Clancy is in your best interest. Our team can examine your circumstances to determine the best course of action to help you through these incredibly complex matters. Contact us today to learn how we can assist you.
