Divorce & Bankruptcy
Jason A. Márquez, Colorado Family Law Attorney
A significant number of marriages end as a result of money problems or disputes. These money issues often involve significant debt. In dissolution of marriage cases, the parties’ debts and assets will be allocated to the parties by agreement or Order of the Court. When the debts far exceed the assets, bankruptcy is often the only resolution. It is important to know if and when to file for bankruptcy when you are also seeking a divorce. This discussion presents a summary of the impact of bankruptcy on a divorce proceeding and is not intended to provide a primer on bankruptcy.
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Probably the most common type of bankruptcy is a Chapter 7 Liquidation. Generally speaking, most debts are discharged in a Chapter 7 bankruptcy. However, the bankruptcy court will not discharge certain debts like taxes, student loans, child support, spousal maintenance and some asset allocation obligations found in a divorce. The other main type of bankruptcy is a Chapter 13 Restructuring. They are harder to qualify for but they provide a method of restructuring your debt and entering a repayment plan. In domestic cases, all debt is generally allocated to one or the other party. Therefore, Chapter 7 is often the preferred method in divorce situations because it does not generally create future obligations. However, liquidation will not address debt that cannot be discharged, which must then be addressed in a divorce settlement.Â
It is also important to note that certain assets will be protected from liquidation. The court calls those assets exempt property. The exemption applies to certain assets such as: vehicles up to $5,000; equity in homes up to $60,000; some retirement accounts; child support and maintenance received, etc. The basic lesson from exemption is that domestic obligations like child support cannot be liquidated whether you pay or whether you receive such obligations. However, enforcement of such orders is generally not permitted during the pendency of a Chapter 13 proceeding.Â
The more common question is often when to file for divorce. Once parties are divorced, the bankruptcy court may not have access to marital property. Marital property is generally any asset or debt acquired during the marriage. After a divorce, marital property no longer exists. If one spouse files for bankruptcy after divorce, the court will not have access to the other spouse’s property that has become separate property. Therefore, the general rule is that parties should file for bankruptcy together before they are divorced. However, there are many exceptions to the general rule.  It is important to consider a host of other factors as well. A professional attorney may help you navigate the complexities of bankruptcy, divorce and more importantly, how they interact.Â
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