Bankruptcy and Divorce
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 can be a cause of bankruptcy. One spouse is often left with large debts to be paid, along with child support and/or spousal support. In the past, selling the marital residence would often result in each spouse receiving a substantial sum of money. However, in recent years, the drastic loss of equity in real estate has left 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.
When Should a Bankruptcy be Filed in New York if Divorce is Being Considered, or a Divorce Action is Pending?
Bankruptcy can resolve the problem of which party is responsible for debts accumulated during the marriage. In New York, debts that are 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.) As long as the parties are still married, they 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 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.
Should One or Both Spouses File for Bankruptcy if a Divorce is Pending in New York?
Whether one or both spouses in a New York 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 or Child Support Proceedings in New York 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, the automatic stay does not apply to the commencement or continuation of a civil action or proceeding for the following categories, i.e. these proceedings are not stayed by the filing of a bankruptcy.
- 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; or
- 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 non-filing 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 property of the estate. This means that in a Chapter 7 case, 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
Can Debts Arising From a New York Divorce be 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 are established by a 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 are 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 other 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 non-filing spouse can be dischargeable in Chapter 13, depending on whether or not the fees are determined to be in the nature of support.
Andrew M. Doktofsky, P.C. | Long Island Bankruptcy and Divorce Lawyer
Contact Andrew M. Doktofsky, P.C. at 631-812-7020 for a free consultation about how bankruptcy affects your divorce in Suffolk County and Nassau County, New York. This includes Deer Park, Babylon, West Islip, Bay Shore, Brentwood, Hauppauge, Huntington, Lindenhurst, and Hempstead, along with all Long Island communities. Andrew Doktofsky is an experienced Long Island bankruptcy attorney who has also handled contested divorce cases. This makes him uniquely qualified to understand the complex bankruptcy issues that arise in the context of matrimonial cases in New York.