Bankruptcy and Family Law – Does One Affect the Other?

Bankruptcy can be helpful for family finances, especially in this current economy. Consumer credit debt can be erased, leaving more money for day-to-day necessities and other important commitments such as child support.

There are other reasons bankruptcy can be helpful. You can eliminate debt from old taxes, and if debt issues are solved before filing for divorce, the dissolution proceedings often go far more smoothly.

A married couple needn’t file for bankruptcy as a couple, but there may be consequences to community property if one spouse files alone. Non-exempt assets are automatically included in the bankruptcy estate of one spouse files for bankruptcy protection alone. The sale of these non-exempt assets ensures that money received from the sale can go toward outstanding debts.

However, most chapter 7 bankruptcy petitions have no assets, so most of the time, none of the assets are counted because all property is considered exempt. However, if one spouse files for bankruptcy, the automatic stay will not apply to the spouse who did not file.

The 2005 amendments to the bankruptcy law changed the law so that the debt originating in divorce proceedings will not be discharged in a chapter 7 bankruptcy. However, bankruptcy law states that all debt, even if it is not dischargeable, must be included in the bankruptcy petition paperwork.

Debts to a current or former spouse must be listed on bankruptcy filings, but this does not mean that the debt will be discharged or that the filing party is trying to discharge the debt. If your spouse is filing for bankruptcy, you must know this fact and take action to defend your property and your interest.

When one spouse is personally responsible for a debt, and the other spouse has filed for bankruptcy protection, creditors can come after non-exempt assets and sell those assets to pay debts. Community property the couple has together during the course of the marriage can be held responsible for debts incurred during the marriage.

Assets such as inheritances received by one spouse during the marriage, property owned by one spouse prior to the marriage, and gifts to one spouse during the marriage are not property. Earnings and income of either on both spouses, real estate and other assets acquired during the marriage are considered community property.

If a couple seeks a divorce during a bankruptcy, family courts will not be able to divide any assets that are in the bankruptcy estate, except where the assets are exempt. Community property gets divided during a divorce proceeding. When the assets are divided, the property is no longer community property as it becomes personal property. Creditors are no longer allowed to go after community property to satisfy debts because community property has ceased to exist.

Although credit reporting agencies are not supposed to list the bankruptcy on your credit report if your spouse filed for one and you did not, the bankruptcy may be noted on your report anyway. Whether this practice is proper from a legal standpoint, however, is still unclear.