Divorce is never easy. Along with the emotional stress and frustration that it brings, especially during trial and discovery, the process involves various complex legal nuances and decisions must be made promptly.
These decisions mainly link to even more nerve wrecking complications such as child custody, alimony/ child support, visitation and parenting schedule, equitable division of marital real estate and other assets, etc.
However, another thing that can inject an added pressure and frustration in an already contentious divorce process is if your spouse files for bankruptcy. If they’ve already begun the legal process of declaring bankruptcy in the middle of the divorce case, it can have an adverse impact on a variety of factors.
However, the impact will primarily be on the equitable distribution of your marital assets and estate distribution. But what the bankruptcy is not going to affect are things such as child support and child custody.
Understanding Why Bankruptcy Is Going to Indefinitely Delay Distribution of Marital Assets
One of the most important things to realize is that if you or your spouse decide to file for bankruptcy in the middle of the divorce case, most of your marital assets and other properties will then be transferred to the bankruptcy estate.
And because the court automatically puts a stay on all your marital assets and other properties (cash, commercial real estate, etc.), it means you will no longer be in a legal position to exercise your control on those assets, which is also going to negatively impact the division of those assets upon the final divorce order.
What If One Spouse Files for Chapter 7 Bankruptcy?
There are two types of bankruptcies that individual can apply for, Chapter 7 and Chapter 13 bankruptcies. For this article, we’re going to talk about former.
If your spouse declares Chapter 7 bankruptcy during before the final divorce order is given by the judge, the circuit court is going to appoint an expert bankruptcy professional or a trustee to handle your situation.
In Chapter 7 bankruptcy, the court-appointed professional will be given the authority to sell those assets that are non-exempt, which typically involve cars, commercial properties, etc., to settle the debt with your creditors.
However, because your spouse has filed for Chapter 7 bankruptcy in the middle of the divorce, the trustee is going to first evaluate the types of assets that can be included as part of your estate and can be legally sold to pay off your debts.
In addition, if you and your spouse live in a jointly owned marital home, it is quite possible that the bankruptcy trustee will sell the property. However, this will only happen if you fail to have your interest value (on the property) exempted.
How The Bankruptcy Filing from Your Spouse Can Affect You During Divorce
It may seem unfair or as a dirty tactic that your spouse files for bankruptcy before the divorce is finalized. However, they have a legal right to. It can be that they must make insurmountable debt payments, which can only happen if the non-exempt assets are sold. But, yes, it is going to affect you.
It is going affect you primarily because your divorce is not yet finalized, and legally, you are still married to your soon-to-be ex. This also means that you may likely need to clear your debts with your wife and husband after they have filed for bankruptcy.
However, the one filing for bankruptcy will have the process reflected upon their credit report. But it’s not going to be reflected on yours. In case you do see a bankruptcy notification on your credit report, you must immediately address the situation by consulting with your attorney.
Impact on the Non-Filing Spouse’s Equitable Distribution
Equitable distribution of marital or other assets upon the finalization of a divorce process essentially refers to a fair disbursement of property among both spouses. However, things change if one spouse files for bankruptcy.
For instance, there are going to be specific costs and fees associated with your legal counsel or any other pertinent payments that will need to be cleared irrespective of the bankruptcy. In addition, you will also need to pay your spouse any debts that you owe them after they have filed for bankruptcy. In addition, it is also possible that some percentage of your marital assets may also be sold by the bankruptcy trustee to pay of your spouse’s creditors.
However, what you shouldn’t be worried about is the fact that a bankruptcy filing will never impact other major components of your divorce, such as child custody and child support. Child support must be paid by the filing spouse no matter what.
Other Possible Factors That May Present a Challenge When Your Spouse Files for Bankruptcy
First, it is vital that you see that the bankruptcy filing and your divorce are two separate entities. At the same time, you must also understand what an automatic stay on your marital assets means.
You see, as soon as your spouse claims that they are bankrupt and files for the process, your marital assets automatically have a stay order on them. The stay remains if the trustee evaluates which assets need to be sold to pay off the creditors. However, this also means that until that happens, your divorce will not be finalized.
What To Do If You’re in the Middle of Your Divorce and Your Spouse Files for Bankruptcy
Divorce can be a long and emotionally daunting undertaking. You are going to be stressed out and you will also need to make some tough decisions. However, if your husband or wife files for bankruptcy before the divorce is finalized, this can put an added level of stress on the whole process.
This is where it become very important for you to seek the best legal representation you can along with equipping yourself with the right knowledge so that you can have a better understanding of what to expect.