Divorce and Bankruptcy

Divorce is a life-changing event that can overwhelm you emotionally as well as financially. When bankruptcy is added to the equation, the divorce proceedings can become more complicated. However, a divorce is considered one of the major causes for bankruptcy filing because it can often disrupt the finances of the divorcing parties.

If you are considering a divorce along with a bankruptcy, you should obtain legal advice from a reputable Orange County divorce lawyer with expertise in handling divorce and bankruptcy cases.

How a Bankruptcy Affects Your Divorce in California?

In general, bankruptcy filing in California will result in a freeze over all your matters related to your assets and debts until the bankruptcy is finalized. If your divorce proceedings are going on, it will mean that property division cannot be effected until the bankruptcy case has ended.

When you file for a bankruptcy, all your property, including community property, will become part of the bankruptcy estate. This bankruptcy estate will pay off the debts that you owe to others before your bankruptcy case ends. Therefore, until the bankruptcy court has finalized your property matters, the divorce court cannot take up your property division.

Bankruptcy Filing Prior to Your Divorce

Prior to your divorce filing, you and your spouse may agree to file for bankruptcy if you have major marital debts. In a California divorce, the community debt will be divided equally the same way as community assets between the spouses. But in a bankruptcy, the court will discharge only your share of the debts if you have alone filed for bankruptcy.

If you own the debts jointly with your spouse, even after your share of the debts has been discharged in a bankruptcy, your spouse will be liable to pay his or her portion of the debt to the creditors. Therefore, in many cases, it makes sense to file jointly for bankruptcy prior to filing for divorce, so that both processes can be completed efficiently and the divorce proceedings can occur without delay.

Key Facts to Know about Bankruptcy and Divorce

Here are some of the basic facts about bankruptcy and divorce, which will help you understand the legal implications. To understand these facts in detail, you should consult with a divorce and bankruptcy lawyer in Orange County.

You and/or your spouse have a right to file for bankruptcy before, during or after your divorce. Either party cannot stop the other from filing a bankruptcy.
Two common types of bankruptcy filings for divorcing couples include Chapter 7 and Chapter 13.
Chapter 7 is the most typical recourse for divorcing parties. This bankruptcy will discharge most types of debts, except alimony, child support, tax liability, and student loans, etc.
Chapter 13 is aimed at reorganizing debts, so that the creditors will not be able to seize your assets. This bankruptcy will include a plan to repay the creditors within three to five years.
Whether you file a bankruptcy under Chapter 7 or Chapter 13, your debts such as spousal support and child support cannot be discharged.
Bankruptcy is not a tool to seek revenge on your ex-spouse, if you own community property together with him or her. Unless you are filing bankruptcy jointly with your spouse, their share of the assets or debts will not be affected.

For Faster Divorce Resolution, Choose Chapter 7

Chapter 7 bankruptcy involves a simpler process with a faster timeline. You can expect all the dischargeable debts to be eliminated in less than six months. Therefore, your divorce proceedings can be started or resumed as soon as the bankruptcy is finalized.

Chapter 13 bankruptcy, on the other hand, involves debt reorganization and a repayment plan that must be approved by the creditors. This can take a longer time, which will in turn extend your divorce resolution.

Some Debts are not Discharged in Bankruptcy

While a Chapter 7 bankruptcy will provide relief by discharging most types of debt, some debts cannot be forgiven through this process because they are deemed non-dischargeable under the law. This means, you will still have the liability to repay those debts. These may include:

Child support
Spousal support
Court penalties or fines
Fines imposed by government agencies
Student loans
Legal fees related to child custody or support matters

Bankruptcy Impact on Retirement Accounts and Jointly Owned Real Estate

When you individually file for a bankruptcy, it will generally have no impact on your spouse’s assets and debts. The Trustee in a Chapter 7 bankruptcy will take over your non-exempt property, but they cannot seize your spouse’s property.

In case of jointly owned land, real estate or another asset, things can get more complicated. It may be necessary sell off the jointly owned property so that the Trustee can take over your share of it in a bankruptcy.

When it comes to retirement accounts and pensions, you have substantial protections in a bankruptcy in California. For most types of retirement plans, the exemption from creditors is unlimited. This means the full amount in those retirement accounts is protected in a bankruptcy. These fully protected retirement plans include 401K, 403B, Keoghs, employee annuities, stock bonus plans, profit sharing plans, money purchase plans, government deferred benefit plans, and defined benefit plans.

However, IRAs (including both traditional and Roth IRAs) will exempt from creditors in a bankruptcy only up to a limit. This limit is quite substantial (more than a million dollars for each individual, which is adjusted every three years). Veteran benefits and social security are also exempt in a bankruptcy under federal law, which also applies to residents in California.

Seek Legal Counsel from a Seasoned Divorce and Bankruptcy Lawyer

Each divorce and bankruptcy situation is unique, and you and the other party need to think through it carefully before determining the right course of action. Your best bet would be to obtain legal advice from an Orange County lawyer with thorough knowledge of the divorce and bankruptcy laws in the state and past experience in handling such cases.