If you or your spouse have filed for bankruptcy and then you or your spouse file for divorce in Naples, Collier County, Florida, you’ll need to know how each action affects the other. This is also true if the divorce is filed first and then the bankruptcy is filed after.
It’s important to understand that there are two types of personal bankruptcies because the implications of a concurrent divorce will depend on which kind of bankruptcy was filed.
A chapter 7 bankruptcy is where all of the filing party’s debts are discharged or wiped away. The chapter 7 bankruptcy filer’s assets beyond a few thousand are also forsaken. The process for a chapter 7 bankruptcy is very simple and takes just a few months.
A chapter 13 bankruptcy is where the filing party’s debts are slowly paid back at a rate that is manageable for the debtor. The advantage is that the debtor is allowed to keep his assets in this process whereas, in a chapter 7 bankruptcy, the debtor would lose all his assets as part of the deal in erasing his debt.
Bankruptcy law allows married couples to file in a single bankruptcy petition together. This saves on filing fees and saves on legal fees as the married couple can use the same lawyer. If the couple files for bankruptcy together and then someone files for divorce, the bankruptcy lawyer automatically has a conflict of interest because the bankruptcy lawyer is now representing two opposing parties. A lawyer with a conflict of interest is required to withdraw from the case.
In a chapter 7 bankruptcy, the divorcing parties can easily enter into an agreement to continue the bankruptcy acknowledging that the bankruptcy lawyer has a conflict after the divorce filing but the parties are prepared to proceed with the bankruptcy. A chapter 7 bankruptcy only takes a few months to process and it would resolve many of the issues in the divorce because there would be no assets or debts to split.
A chapter 13 bankruptcy and a concurrent divorce would be a different matter. A chapter 13 bankruptcy can take from three to five years to resolve. The bankruptcy attorney would need to representing the parties throughout the entire period. Presumably, the parties would want to be divorced before three to five years. The bankruptcy attorney would almost certainly have to withdraw the dual representation of the couple.
In both chapter 7 and chapter 13 bankruptcies, an automatic stay is required in all legal actions, including divorce. An automatic stay is legalistic way to say “all other legal actions involving the debtor are frozen.” This is because the bankruptcy is supposed to sort out the debts and assets of the bankruptcy filer because presumably there are more claims on those assets than there are assets to distribute. Bankruptcy is the ideal system to distribute those limited assets to the numerous creditors (which may include a wife or husband).
The other reason that a bankruptcy can overpower a divorce is that bankruptcy is rooted in federal law and divorce is rooted in state law. The supremacy clause of the United States Constitution commands that federal law be followed first when it contradicts state law.
The supremacy clause is also the reason that all of the rules we’re discussing apply equally to all 50 states not just Florida.
This does not mean that a divorce petitioner is stuck in limbo for five years in the case of a Chapter 13 bankruptcy. The Bankruptcy code provides exceptions for family law matters:
- Establishment of paternity ; 11 U.S.C. §362(b)(2)(A)(i)
- Establishment or modification of an order for domestic support obligations (child support or alimony); 11 U.S.C. §362(b)(2)(A)(ii)
- Custody of visitation; 11 U.S.C. §362(b)(2)(A)(iii)
- Getting the actual divorce decree (unless the proceeding seeks equitable distribution of property of the estate); 11 U.S.C. §362(b)(2)(A)(iv),
- Domestic violence. 11 U.S.C. §362(b)(2)(A)(v).
In short, the only thing that doesn’t get frozen in an automatic stay is the distribution of debts and assets in a divorce…because the bankruptcy is taking care of those issues already.
But, the judge in the divorce petition needs to be made aware of the bankruptcy action so they can act appropriately. Different courts do not like to step on each others’ toes.
A bankruptcy filing may be to your advantage in that it simplifies the process by eliminating assets and debts. In addition, it creates another party interested in your spouse’s debts and assets, the bankruptcy trustee who is charged with ascertaining and distributing those assets and even verifying income. A bankruptcy trustee is an experienced lawyer who is double checking your spouse’s financial situation.
Finally, a bankruptcy requires a transparent disclosure of a party’s financial situation that can be revealed through the filing of the bankruptcy petition which is available to any lawyer with a federal court PACER account.
Contact my family law office in Naples, Florida to learn more about how a bankruptcy could effect your divorce case and vice versa.
If you’re in trouble with debt, especially tax debt, I highly recommend the Rothrock Law Firm in Naples, Florida. Direction to their office from my office are below.