With increasing frequency, our clients must decide if they should pursue a bankruptcy before or after a divorce case.  In making this determination, there are several areas that you should discuss with your attorney.


            In relatively amicable cases, there are several advantages of completing the bankruptcy prior to filing for a dissolution.  Most bankruptcy attorneys will charge the same price to a single person filing a bankruptcy as to a married couple filing a bankruptcy.  Additionally, the couple would only pay a single filing fee to the court.  If the bankruptcy is completed prior to the dissolution proceeding, the elimination of the majority of the community debt (and possible reduction of assets) significantly simplifies the equitable division of assets and debts.


            In many cases, however, the urgency of the family law matter or the level of acrimony between the parties makes it unrealistic to ask the couple headed for a dissolution of marriage to work together gathering the necessary information to file a bankruptcy, while putting the dissolution of marriage on hold for several months.  The same issues that arise in dissolutions regarding the hoarding of documents and information or the hiding of assets and income may arise in the bankruptcy setting.  Lack of information or improper information regarding assets, debts, and income will result in the bankruptcy stalling or derailing, the case being dismissed, or the bankruptcy discharge being denied.  In high conflict cases, the family law practitioner may need to counsel the client to proceed first with the dissolution of marriage, with the understanding that the client may need to file for bankruptcy at the conclusion of the family law matter.  


            Occasionally, a party to a pending dissolution will file for bankruptcy, or a party in an ongoing bankruptcy will file for a dissolution of marriage.  The family law practitioner must proceed cautiously when both cases are pending.  Immediately upon filing a bankruptcy, an Automatic Stay is issued under federal bankruptcy law.  Similar to a Preliminary Injunction, the order is automatic and does not require a request to a judge or a judge’s signature to take effect.  The filing of a bankruptcy has the effect of placing all of the filer’s assets and debts into a “bankruptcy estate.” Without getting into the details, bankruptcy’s Automatic Stay prevents any person from commencing or continuing any action that would affect the bankruptcy estate.  This injunction prohibits the Superior Court from entering any temporary or permanent orders allocating assets or debts during the pendency of the bankruptcy, unless the stay is lifted by the bankruptcy court after a request has been filed.  The filing of a bankruptcy during a dissolution of marriage proceeding will therefore require hearings on property issues to be held in abeyance. 


A dissolution proceeding can be filed while a bankruptcy is pending, and the Petition may request the Superior Court to equitably divide community property.  The statutory language establishing the automatic stay 11 U.S.C. § 362 specifically allows for the commencement or continuance of a dissolution or paternity, or the establishment or modification of child support, spousal maintenance, custody and visitation issues.  However, the superior court is temporarily divested of jurisdiction to determine the division of property and debts included in the bankruptcy estate.  The division of assets and debts can only proceed once the automatic stay is lifted, either at the conclusion of the bankruptcy or by order of the bankruptcy court after a request has been filed.


            Tremendous problems can arise when the bankruptcy is filed shortly after the dissolution of marriage.  A party taking a greater part of the marital debts and a larger share of the marital assets may appear to be getting a fair and equitable division of the net assets and debts.  However, if the debts are then discharged in a subsequent bankruptcy, this party has obtained an inequitably larger share of the marital assets.  The inequity is worsened in cases where spousal maintenance is forever waived based upon a perceived distribution of assets and debts.  Furthermore, a payment owed to another party to equalize the division of assets and debts in a dissolution of marriage (“equalization payment”) can be discharged in a Chapter 13 bankruptcy.  When these issues arise, individuals should get a bankruptcy attorney involved immediately to assist in challenging such a scheme in the federal bankruptcy court.


            Ultimately each case must be individually assessed to determine the best timing for a dissolution of marriage and a related bankruptcy.  Please call us at 928-225-2597 to discuss your situation.  You can also visit our Website to find more information on divorce and bankruptcy issues.