Should you file a Bankruptcy before you file a Divorce Petition?
Dealing with debts that could be discharged in Bankruptcy first may prevent the need to return to the Family Law Court when, for whatever reason, a spouse that is assigned a debt in the Family Law Court Order fails to pay the debt.
Family Law Court is a court of limited jurisdiction which means, the Family Law Court orders are orders over the parties in front of it, the spouses, not the creditors. If the Spouses fail to pay a creditor, the creditor may legally collect according to their original contract with the spouses. The only remedy against the non-paying spouse is to return to the Family Law Court and ask the Court to hold the non paying spouse in contempt of the Family Law Court Order. If the collecting creditor holds unsecured claim that could be forgiven in Bankruptcy, then filing a Bankruptcy first eliminates the need to return to Family Law Court later.
What is an unsecured claim that could be forgiven in Bankruptcy?
It is easier to explain the difference between unsecured and secured debt. A mortgage or auto lender can take back the item purchased if the borrower does not pay, whereas a credit card company cannot take back the purchases for food, clothing and other basic necessities. The credit card company in this example is an unsecured creditor.
The Bankruptcy Code lists the types of debts that are usually not forgiven in Bankruptcy. The most common types are debts for taxes, fraud, student loans, child support, and death or personal injury resulting from operation of a motor vehicle if intoxicated. Sometimes student loans and taxes are dischargeable and information on these types of debts can be found in our other blog articles.
The Bankruptcy Trustee may bring the non-filing ex-spouses’ assets into the filing spouses’ bankruptcy estate if the Bankruptcy is filed within 90 days to one year from the date of the Family Law Court Judgment.
When the Family Law Court Order simply divides the assets and it appears the asset division is lopsided, the Trustee may ignore the Family Law Court Order division. When one spouse was a spender and the other spouse a saver during the marriage; and the parties agree about the division of the property without showing why the property was divided the way it was, it may appear that the property was divided unfairly. The Bankruptcy Trustee is allowed to ignore the ‘unfair division’ in the Family Law Court Order and includes the saver's spouses assets in the spending spouses bankruptcy estate if the final judgment in the divorce is entered on the Family Law Court docket within 90 days to one year before the Bankruptcy Petition is filed.
How can the Bankruptcy Trustee ignore the Family Law Court Order?
The non-filing spouse is considered an ‘insider’ of the filing spouse because, even though they are no longer married, they were a relative of the filing spouse.
The Bankruptcy Code allows the Bankruptcy Trustee to avoid any transfer to an insider made on or within 90 days and one year before the date the bankruptcy petition is filed. If the Family Law Order is within 90 days and one year before the spending spouse files a bankruptcy petition the Bankruptcy Trustee may ignore the Family Law Courts Order and the property is divided as if it was all community property.