Bankruptcy and Divorce: How These Two Play Together in CA

By October 3, 2018Divorce
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In California, divorce and bankruptcy sometimes go hand-in-hand. One or both parties may find themselves unable to pay family debts, or one spouse may try to use a bankruptcy to give themselves a financial advantage. Most concerns about divorce-related bankruptcies fall into one of these categories:

  • The payment of joint credit card debt.
  • The payment of alimony or child support.
  • The enforcement of a property settlement.

First, a quick answer on spousal or child support payments. Section 523(a)(5) of the Bankruptcy Code prohibits in all chapters the discharge of any and all support obligations. Here are some other common scenarios where divorce and bankruptcy cross paths.

Spouse Files for Bankruptcy During Divorce

A divorce sometimes trigger a bankruptcy filing by one spouse. Unfortunately, this can prolong the process and complicate property division issues. California is a community property state, so even if only one party files for bankruptcy, all matters relating to community property and debts are frozen until the bankruptcy case is completed.

The only exception might be in cases involving pre- or post-nuptial agreements. Once a spouse files for bankruptcy, a bankruptcy estate is established that includes assets such as the family home, pensions, stock portfolios, or mutual funds that can be used for paying debts owed by the filer. All such debts must be paid before the bankruptcy can be finalized. However, the court can still hear testimony on and decide issues related to support.

Filing for Bankruptcy Before Filing for Divorce

If you know ahead of time that either one or both of you will be unable to pay certain debts after divorce, you might want to consider filing for bankruptcy jointly. Just be sure to do so before you file divorce papers.

Just like community property assets are divided between the parties, so too are marital debts. If only one spouse files, he or she is the only one entitled to have their debts discharged. If those debts were joint, this could leave the other spouse open to creditors trying to get payment from them. To avoid being left responsible for any such debt, it’s worth speaking with an attorney about filing for joint bankruptcy.

Enforcing Judgments

Along with support obligations being non-dischargeable under the Bankruptcy Code, all property settlements owed from one spouse to the other, or to a child, are non-dischargeable in a Chapter 7 bankruptcy. Some debts, however, are still dischargeable in a Chapter 13 bankruptcy, so due caution and consultation with an attorney are in your best interests.

Foreclosure and Bankruptcy

If you’re in the middle of a divorce and are served with foreclosure papers because you can’t keep up the mortgage payments, it can be a frightening time thinking you’ll lose your home. Filing a Chapter 13 bankruptcy will stop the foreclosure and gives your family some time to propose a debt restructuring plan. Even if you are unable to reach such an agreement, filing for Chapter 13 relief can buy you time to find another place to live that is more within your means. It can also give your family enough time to put the home on the market yourself, which is always better than what you’d receive from a foreclosure sale.

Remember, filing for bankruptcy during or after a divorce is not an effective way to avoid basic financial commitments that typically occur between spouses. Above all, if your spouse files for bankruptcy before, during, or after your divorce, do not ignore it. Speak to a family law attorney who will go over all your options to protect your interests in the community assets.

Getting a divorce can be a financial disaster, which is why it is best to hire a lawyer who specializes in divorce or family law. They will know how to best protect your assets and guide you through the process with ease. For more information or to schedule a consultation, click the button below, or call us at 619-289-7948.  We look forward to helping you!

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