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What Happens in a Divorce If You File for Chapter 7 Bankruptcy

Divorce and bankruptcy often go hand in hand due to the financial strain a marital split can cause. In turn, the financial stress of bankruptcy can further damage the already frayed relations between spouses. Many people lack the tools and knowledge they need to protect themselves if they find themselves on the verge of insolvency while their family life is breaking apart. Therefore, if you are getting a divorce while filing for Chapter 7 bankruptcy, you will want to read this article. We will delve into the basics of Chapter 7 bankruptcy, the effects it has on various aspects of divorce proceedings, and how you can protect yourself. Contact an experienced California divorce attorney today!

What Is Chapter 7 Bankruptcy?

In general, bankruptcy is a legal process that attempts to help debtors get relief from debts that they are unable to pay. Bankruptcy proceedings are governed by federal law, not California law. And under federal law, there are several kinds of bankruptcy. Chapter 7 bankruptcy, also known as “liquidation” bankruptcy, is one of the most common types of bankruptcy for individuals. 

The concept behind Chapter 7 is that your assets are liquidated to repay your creditors. Federal bankruptcy laws often include statutory exemptions for certain kinds of property. In many cases, individuals who file for Chapter 7 do not have assets exceeding the exempted amounts. This means that few or none of their possessions have to be sold.

Once you file for bankruptcy, an automatic stay comes into effect. This stay prevents creditors from taking any collection actions against you. Following the sale of non-exempt assets and the repayment of qualifying debts, the court will discharge your remaining unsecured debt. Common examples of unsecured debt include things like credit card bills and medical bills. A discharge in bankruptcy essentially wipes out the debtor’s personal liability for the debt. Therefore, you are no longer responsible for paying the debt.

How Does Chapter 7 Affect Divorce Proceedings?

Filing for Chapter 7 bankruptcy can greatly impact the timeline and outcome of a divorce proceeding. The automatic stay that we mentioned earlier pauses most legal actions against the debtor, including divorce proceedings. The stay can delay the divorce until the bankruptcy is completed. A typical Chapter 7 bankruptcy proceeding takes about three to six months to wrap up. That said, the stay doesn’t pause all aspects of the divorce. Child custody, child support, and alimony proceedings can still continue. Let’s examine what effect, if any, Chapter 7 bankruptcy proceedings have on these three issues.

Child Custody

In child custody proceedings, a court’s number one goal is to promote the best interests of the child. In most cases, courts will not consider an ongoing bankruptcy proceeding when evaluating what outcome is best for the child. However, if one parent’s financial situation is such that they are unable to feed, cloth, and care for the child, the court may award sole custody to the other parent.

Child Support

Under federal law, domestic support obligations like child support and alimony are exempt from discharge in Chapter 7 bankruptcy. This means that filing for Chapter 7 bankruptcy will not eliminate these debts. If you have an obligation to pay child support or alimony, you must continue to make those payments during and after the bankruptcy process. 

Furthermore, past-due child support and alimony debts receive high priority in bankruptcy proceedings. Therefore, if the court determines you have any non-exempt assets during a Chapter 7 bankruptcy, it will liquidate those assets to pay these debts as soon as practical.

Finally, federal bankruptcy law also prevents the automatic stay from halting collection actions for domestic support obligations. Consequently, any efforts to collect overdue child support or alimony can continue despite the bankruptcy filing.

How Does Chapter 7 Compare to Other Kinds of Bankruptcy for Individuals?

Another type of bankruptcy proceedings that individuals commonly use is Chapter 13 bankruptcy. Chapter 13 bankruptcy is a reorganization bankruptcy, which means it will help you develop a repayment plan to pay back your debts. Compared to Chapter 13, Chapter 7 is usually quicker, less expensive, and discharges your unsecured debts completely. However, you are more likely to lose property with Chapter 7 than with Chapter 13. Finally, Chapter 13 allows debtors some additional flexibility when it comes to paying off their overdue child support obligations.

Understanding Hold Harmless Provisions

A divorce decree can divide marital debt between spouses, but it cannot relieve you of your legal obligation to your creditor. That means if both spouses’ names are on a debt and the spouse ordered to pay it defaults, the creditor may be able to collect that debt from the other spouse. For this reason, many divorce agreements feature a “hold harmless” provision. The terms of this clause give each spouse the right to seek compensation from the other if creditors come after them for a debt their spouse was assigned in the divorce decree. Generally, money you owe your spouse under a hold harmless provision is not discharged by Chapter 7 bankruptcy.

For example, imagine you and your spouse had a credit card debt in both your names. Under the terms of the divorce decree, you are obligated to pay the debt and required to hold your spouse harmless. You discharge the debt in bankruptcy, and the creditor collects the debt from your spouse. Under the hold harmless provision, your spouse can then sue you to get compensation for what they paid the credit card company.

How to Protect Yourself from the Effects of Chapter 7 Bankruptcy

If you are concerned about the possibility that your ex-spouse will declare bankruptcy during or after divorce proceedings, you can take several steps to protect yourself:

  1. Separate your finances. Before filing for divorce, separate your finances. This will both protect your credit score and help make it clear to the court which assets are truly yours.
  2. Close joint accounts. Close all joint accounts and pay off any joint debts before filing for divorce or bankruptcy.
  3. File joint bankruptcy. Depending on your circumstances, it may make sense to file a joint bankruptcy with your spouse prior to getting divorced.
  4. Understand California’s property laws. California is a community property state, which means that all assets and debts acquired during marriage are jointly owned. This means that you will have to prove that certain assets and debts are not yours.

Finally, contact an attorney. Getting a divorce while filing for Chapter 7 bankruptcy is overwhelming. A legal professional can help you understand how one area of law interfaces with the other. They can also use their special legal knowledge to help you navigate toward an ideal outcome. 

Filing for Divorce During a Chapter 7 Bankruptcy Proceeding? Pakpour Banks LLP Can Help

Divorce proceedings can bankrupt even wealthy individuals. Fortunately, a talented attorney can help dispel bankruptcy myths and put you on the path toward rebuilding your credit. At the same time, they can help maximize your chances of obtaining the best outcome in a divorce proceeding. 

Our attorneys at Pakpour Banks LLP have years of dedicated service to clients in Yolo County and the surrounding area. In addition, they have a passion for helping individuals recover from difficult life chapters, including bankruptcies and divorces. 

At Pakpour Banks, we prioritize outstanding customer service. Our aim is to provide you with the personalized assistance you deserve. Thanks to our hard work and client-centered approach, we have dozens of testimonials from satisfied clients. Join their ranks. Get in touch with us today to set up an initial consultation.

Author Photo

Brian enters the family law profession with a refreshing approach to these proceedings: heal families; don’t destroy them. In some cases, this means the family is going to look different than it did before. In other cases, this means a new family is created where there was none before. Either way, individuals should leave family court knowing their voices were heard, and with healthy attitudes about themselves and those they love.

Read More Legal Blogs By Brian Pakpour

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