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A REALLY TERRIBLE YEAR: DIVORCE AND BANKRUPTCY ON THE SAME PLATE

Some years are better than others and this one has been truly awful. First, the downturn in the economy caused you and your spouse to incur all sorts of personal debt and your income was reduced to the point where you just can’t meet your obligations. Then it got even worse. Your relationship with your spouse went from not so hot to horrible. It is now evident to you that you are going to be involved with both a divorce and a personal bankruptcy, but in what order?

The best scenario is that you and your spouse are at least talking with each other and are willing to tackle this problem together. If so, then it is often wise to consider filing the bankruptcy first. If you and your spouse file together as man and wife there is only one attorney fee and one court cost to be paid so you have collectively saved money. Further, since the debt for which there is no collateral is wiped out in most bankruptcy filings you won’t have to worry about the divorce court having to divide those bills.

But what if you’re not talking and you know you are going to get hit for maintenance (formerly, “alimony”), child support and an order to pay certain marital debt that has accumulated and to hold your spouse harmless on those debts? An analysis of the bankruptcy code becomes necessary.

Individuals are almost always going to be filing bankruptcy under chapter 7 or chapter 13. A chapter 7 is a liquidation bankruptcy. You file and you keep whatever property you can exempt which is all of your property for most, but not all, debtors. Not everyone will qualify for a chapter 7 and a chapter 7 is not a good idea for some of those who do qualify. A chapter 13 is a wage earner plan. Depending on the facts of the case, the debtor will typically make payments to a trustee for a period of not less than 36 months nor more than 60 months and the trustee will pay creditors in whole or in part out of those payments.

A chapter 7 bankruptcy will not allow a debtor to discharge debts that are classified as a domestic support obligation. A domestic support obligation is maintenance or child support. A chapter 7 also excludes from being discharged debts to a spouse, former spouse or child of the debtor that arise from a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record. Therefore, if your main financial problem is debts that a divorce court ordered you to pay a chapter 7 probably won’t be helpful.

A chapter 13 bankruptcy also won’t provide a discharge for maintenance or child support however it will allow for discharge of most other court ordered debts arising out of a divorce. Thus, if your financial problems include substantial bills arising from divorce other than support a chapter 13 should be considered although there may be unrelated issues that need to be taken into account and that may indicate against filing a chapter 13.

As a general proposition, if you are not on speaking terms with the spouse and won’t be filing a joint bankruptcy you may well want to file the divorce before the bankruptcy. My concern is that if you file for a chapter 7 bankruptcy first a divorce court judge could decide that you are getting rid of some expenses so it’s appropriate to assign you more of the marital debt which you can’t discharge in a chapter 7. If you file a chapter 13, my concern would be that the judge might try to increase child support or establish or increase maintenance to offset the marital debt you’re going to get out of paying.

As you can appreciate, this is a highly complex situation and each case is different and has to be analyzed on its own merits.

Every case is different and many factors go into a decision to file or not file a particular chapter of bankruptcy. Anyone potentially facing a bankruptcy should seek counsel experienced in that area of the law.

Bernhardt Klippel is an attorney who concentrates his practice in the field of bankruptcy. He may be reached at (314) 862-5300.