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Bankruptcy and Divorce in New York

Bankruptcy and divorce are often intertwined. Financial problems and the stress associated with unmanageable debt can lead to marital discord and eventually divorce. Conversely, divorce itself is often the cause of a bankruptcy filing. One spouse is often left with large debts to be paid, along with child support and/or spousal support. Large mortgage balances have caused a drastic loss of equity in real estate, and can leave divorcing couples with little or nothing. Finally, the high cost of legal fees associated with a contested divorce in New York consumes what little resources divorcing spouses may have.

I am an experienced Long Island bankruptcy attorney who has also handled contested divorce cases. This makes me uniquely qualified to understand the complex bankruptcy issues that arise in the context of divorce actions in New York.

Timing of a Bankruptcy Filing When Divorce is Involved

Filing for bankruptcy before a divorce action is started may be advisable. Bankruptcy can resolve the problem of which party is responsible for debts accumulated during the marriage. In New York, debts that have accrued during the marriage are deemed to be marital debts, regardless of whose name the debt is in (the exception to this might be where one party incurred debt for purchases that were solely for the benefit of that party, as opposed to debts incurred for family expenses). Married couples can file a joint bankruptcy petition, even if they are physically separated. Of course, this requires that the parties are able to cooperate with each other and with their bankruptcy attorney. The benefit is that the divorce can proceed with the issue of marital debt having been resolved. This will often help the parties reach a settlement in the divorce case. In addition, a joint bankruptcy filing is less costly than two separate individual bankruptcy filings.

On the other hand, there may be advantages to filing for bankruptcy after the divorce is final. Although obligations incurred pursuant to a divorce are not dischargeable in Chapter 7, debts owed to a spouse pursuant to a divorce that are not in the nature of support are dischargeable in Chapter 13. See below for more information regarding discharging debts that arise from a divorce.

Should one or both spouses file for bankruptcy if a divorce is pending?

Whether one or both spouses involved in a divorce should file for bankruptcy depends primarily on the amount of debt in each party’s name, as well as in whose name the marital assets are titled, such as real estate, automobiles and bank accounts. Simply discharging the debt of one spouse while leaving the other with a large amount of debt may not resolve the issue of who must pay for the remaining marital debts.

Are Divorce Actions Stayed by a Bankruptcy Filing?

When a bankruptcy case is filed, an automatic stay goes into effect. The automatic stay prevents creditors from taking any action to collect debts owed by the debtor. Court proceedings in which the debtor is a defendant are normally stayed. However, according to Section 362 of the United States Bankruptcy Code, the automatic stay does not apply to the commencement or continuation of a civil action or proceeding in the following categories:

  • for the establishment of paternity

  • for the establishment or modification of an order for domestic support obligations

  • concerning child custody or visitation

  • for divorce or the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the bankruptcy estate

  • regarding domestic violence

What is important to note is that to the extent that marital property is to be distributed in a New York divorce action, the divorce is stayed by a bankruptcy filing. For the divorce action to proceed, it will be necessary to wait until the bankruptcy case is closed. Or, the nonfiling spouse could seek relief from the automatic stay in order to continue with the divorce action.

The automatic stay also does not apply to the following:

  • The collection of a domestic support obligation from property that is not the property of the estate. This means that in a Chapter 7 case, the post-filing income of the debtor can be collected to satisfy a domestic support obligation. However, property belonging to the debtor cannot be taken to satisfy a domestic support obligation unless the Chapter 7 trustee has abandoned the property (either because it is exempt, i.e., the debtor can keep it, or it is of inconsequential value to the bankruptcy estate).

  • Suspension of a driver’s license, a professional or occupational license or a recreational license for failure to pay a domestic support obligation

  • The interception of a tax refund for failure to pay a domestic support obligation

Are Debts that Arise From a Divorce Discharged in Bankruptcy?
  • Domestic support obligations, which are debts for child support, maintenance or spousal support, owed to a spouse, former spouse or child of the debtor that is established by court order, separation agreement or settlement agreement, are not dischargeable in Chapter 7 or Chapter 13.

  • Debts to a spouse, former spouse or child of the debtor that is not in the nature of support, incurred in the course of a divorce or separation or in connection with a separation agreement, divorce decree or another court order, are not dischargeable in Chapter 7, although they are dischargeable in Chapter 13.

  • Keep in mind that whether an obligation is in the nature of support or is instead a distribution of property is to be determined by the bankruptcy court, regardless of what the parties label the obligation in a settlement agreement. This distinction is important in Chapter 13, where property settlement obligations are dischargeable.

  • Debts owed to the debtor’s attorney for legal fees incurred in the divorce are dischargeable in bankruptcy. However, if the divorce judgment directs a party to pay the legal fees of the other spouse, these legal fees are not dischargeable in Chapter 7. Legal fees of the nonfiling spouse can be dischargeable in Chapter 13, depending on whether or not the fees are determined to be in the nature of support.

Call for a Free Consultation

Contact the Law Office of Andrew M. Doktofsky today to answer your questions about filing for bankruptcy if a divorce is pending or contemplated. Andrew M. Doktofsky represents clients in Suffolk County, Nassau County, New York City, and surrounding areas. Call (631) 673-9600, or complete the contact form below.

Andrew M. Doktofsky P.C.  is a debt relief agency. I help people file for bankruptcy relief under the Bankruptcy Code.

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