What Happens if Your Soon-To-Be-Ex Files for Bankruptcy in the Middle of Your Divorce?

By David M. Eisenberg

Navigating the practical, financial, and emotional challenges of divorce is rarely easy, even when the process moves forward quickly and without acrimony or complications. But things can become much more stressful and uncertain when an unexpected wrench is thrown into the proceedings. Such is the case when one spouse files for bankruptcy while their divorce is pending.

It isn’t uncommon for divorce and bankruptcy to go hand in hand, given the financial upheaval and disruption that the end of a marriage can bring. Sometimes, a spouse may seek bankruptcy protection in anticipation of a divorce, and in some instances, it may even be a joint strategic decision. Often, however, the non-filing spouse is taken by surprise when their soon-to-be-ex seeks files for bankruptcy after a divorce has commenced, understandably concerned about the fallout it may cause to the allocation of assets and debts, child support or spousal maintenance obligations and the timeline of their divorce proceedings. 

If you find yourself blindsided by your spouse’s mid-divorce bankruptcy filing, here is what you need to know about how it will affect – and not affect – your divorce.

Chapter 7 vs. Chapter 13

As a preliminary matter, it is important to understand the distinction between the two common forms of individual bankruptcy cases, as the nature of each proceeding will impact divorce differently in some respects.

• Chapter 7 Bankruptcy: Also known as liquidation bankruptcy, Chapter 7 involves liquidating the debtor’s non-exempt assets to pay off creditors. Any remaining eligible debts are typically discharged, subject to important exceptions, providing the debtor with a fresh financial start.
• Chapter 13 Bankruptcy: Sometimes known as a reorganization bankruptcy, Chapter 13 involves creating a repayment plan to settle debts over a period of three to five years. This type of bankruptcy allows the debtor to keep their assets while repaying creditors according to the court-approved plan.

Automatic Stay 

One thing that Chapter 7 and Chapter 13 have in common is the automatic stay. Filing a bankruptcy petition in either type of case effectively slams the brakes on any proceedings involving the debtor’s finances, including collection actions, foreclosures, and the property division aspect of divorce proceedings. 

That said, a bankruptcy filing will not stop your divorce case from proceeding generally, and other essential issues like parenting time, child support, and spousal maintenance will continue to be addressed and resolved by the judge and the parties in the divorce proceedings.

Child Support and Spousal Maintenance

Judges in divorce cases frequently issue temporary orders for child support and/or spousal maintenance during a pending divorce case before establishing longer-term and permanent obligations in a final divorce decree. 

If a judge orders a spouse to pay temporary support or maintenance before or after that spouse files for bankruptcy, those obligations will not be delayed or disrupted because of the bankruptcy. The Bankruptcy Code treats these domestic support payments differently than other debts in both Chapter 7 and Chapter 13 bankruptcy proceedings, and anyone who thinks bankruptcy will be their ticket out of having to make such payments will quickly discover their mistake.

In a Chapter 7 case, a trustee is appointed who effectively takes control of most of the debtor’s assets and uses them to pay off creditors. Once those debtors have been paid to the extent possible using those assets, these debts can be “discharged,” meaning the debtor will be relieved of any further obligations to repay them. 

Some debts, however, are not dischargeable. This includes “domestic support obligations.” A domestic support obligation is:

• A debt owed to or recoverable by a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or a governmental unit.
• In the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent.
• Established or subject to establishment before, on, or after the bankruptcy proceeding because of applicable provisions of a separation agreement, divorce decree, property settlement agreement, or court order.

In sum, child support and spousal maintenance payments will remain the debtor’s responsibility in a Chapter 7 bankruptcy. If the debtor fails to make a domestic support obligation payment that first becomes payable after the petition filing date, the bankruptcy proceeding could be dismissed, and the debtor could lose whatever protection and relief the bankruptcy code provided.

As in a Chapter 7 bankruptcy, a Chapter 13 bankruptcy puts a hold, or automatic stay, on efforts to collect most debts. This provides a debtor with breathing room to devise a plan to repay these debts over a three to five-year period.

Whatever the repayment plan details, child support obligations are treated as “priority” debts in Chapter 13 cases, meaning they will be the first to get paid. Support payments must be paid as they continue to come due, and the plan must ensure the debtor has paid all past-due payments in full by the plan’s conclusion. A debtor who fails to make payments as required by the plan can lose all protections that Chapter 13 provides.

Property Division

In Michigan, a spouse’s individual interest in marital property does not arise until a divorce proceeding is initiated, which can make the timing of a bankruptcy particularly problematic. If one spouse files for Chapter 7 bankruptcy before the divorce proceeding is commenced, the bankruptcy trustee may liquidate non-exempt assets to satisfy creditors. These are assets that the non-filing spouse may otherwise have had an interest in as marital property if the divorce preceded the bankruptcy filing. This would affect the property available for distribution in the divorce and would leave the non-filing spouse as a general unsecured creditor of the filing spouse.  

Debts

Bankruptcy may discharge certain marital debts, relieving the filing spouse of the obligation to repay them. This can impact the allocation of debts in the divorce, as the non-filing spouse may bear a larger share of the remaining obligations. However, as noted, domestic support obligations (e.g., alimony, child support) are usually non-dischargeable in bankruptcy.

If the filing spouse chooses Chapter 13 bankruptcy, they must propose a repayment plan to the bankruptcy court. This plan outlines how they intend to repay creditors over the designated period. The non-filing spouse’s rights and interests may be affected by this plan, particularly if it involves using marital assets or future income for repayment.

On their own, both divorce and bankruptcy can be complicated and stressful processes. When combined, the challenges become even more pronounced. If you have questions or concerns about how bankruptcy may impact your divorce proceedings, please contact David Eisenberg at Maddin Hauser.