Divorce and Bankruptcy

Financial problems are a common reason couples cite as a cause of a NJ divorce, so it is not unusual when divorce and bankruptcy occur at the same time. When a person files bankruptcy while going through a divorce, there are often questions about how the divorce can proceed while the bankruptcy is pending, or vice versa. Fortunately, the two processes can usually happen at the same time, but it is important to understand how the two affect each other. This is why you should consult with not only a NJ divorce lawyer, but a bankruptcy attorney as well.

When filing bankruptcy, an “automatic stay” is put in place, which forces a person’s creditors to stop collecting their debts. During that time, however, a NJ divorce can proceed and certain support obligations, such as alimony or child support can be imposed. The only major divorce proceeding that cannot typically take place during the bankruptcy process is the equitable distribution of marital assets (division of marital property including debts), for which the judge will usually wait until the bankruptcy is finalized.

The Bankruptcy Code attempts to protect the rights of children and former spouses, so child support and alimony obligations have a priority over other creditors in a bankruptcy proceeding. Under the Bankruptcy Code, alimony and child support are considered “domestic support” obligations, which are non-dischargeable in bankruptcy. The automatic stay does not apply to domestic support, so the person must continue to pay child support and alimony.

If the spouse that files for bankruptcy is in arrears for child support, meaning that he or she is significantly behind in those payments, the collection of that debt may be stayed when filing for bankruptcy, although it depends on what type of bankruptcy is filed (Chapter 7 or Chapter 13).

One of the main financial issues a divorcing couple deals with are credit card debts. Credit card agreements require spouses to be jointly and severally liable for any incurred debt. Joint and several liability means that the bank can collect the debt from either of the spouses, regardless of who used the card or how fair it may be to collect the debt from one spouse.

If only one spouse files bankruptcy and the couple has joint credit card debt, the bank can (and usually will) attempt to collect the unpaid debt from the non-filing spouse. The non-filing spouse is then burdened by the entire credit card debt, and regardless of fairness, if he or she does not pay the bill that person’s credit can be ruined. It is important to receive experienced legal counsel by an experienced NJ divorce lawyer if you are going through a divorce and your spouse files for bankruptcy so you can mitigate the financial impact the bankruptcy will have on you.

While most of the divorce process will continue while going through bankruptcy proceedings, the equitable distribution of the marital estate will usually be delayed until the bankruptcy is finalized. This is because a family court judge will not be able to determine what an equitable division of the marital property is while one or both spouses has a bankruptcy pending. However, in some cases a bankruptcy court can issue a Stay Relief order that will gives the family court permission for the equitable distribution to continue.

If you have any questions about bankruptcy during a NJ divorce, please call the Law Offices of Peter Van Aulen at 201-845-7400 for a free initial consultation with an experienced NJ divorce lawyer.