Bankruptcy and Divorce
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The Most Common Types of Bankruptcy
  • Chapter 7: Trustee liquidates debtor's nonexempt assets to pay creditors, most consumer cases involve no nonexempt assets and are closed within 6 months with no payments to creditors, certain debts may be excepted from the bankruptcy discharge, including spousal support and, under certain circumstances, other divorce-related debts.
  • Chapter 13: Repayment plan available only to individuals, trustee collects payments and disburses to creditors, plan usually lasts from 3 to 5 years, debtor must pay secured and priority claims in full but need not pay unsecured claims in full as long as debtor contributes all disposable income to plan and creditor receives at least as much as creditor would receive in a chapter 7 case, certain debts are excepted from the discharge, including support claims but not other divorce-related debts.

What you need to know:
  • Jurisdiction of Bankruptcy Court Set Forth in 28 U.S.C. 1334(a) and (b): Bankruptcy court has nonexclusive jurisdiction over (1) all civil disputes based on bankruptcy law, (2) all civil disputes based on non-bankruptcy law but arising in a bankruptcy case...
  • Automatic Stay: When a bankruptcy petition is filed, a stay automatically goes into effect of all actions by creditors to collect pre-petition debts or to exercise control over property of the estate
  • Nondischargeable Family Law Debts: Section 523(a)(5) of the Bankruptcy Code provides that the following type of debt is not dischargeable in a chapter 7 case...
  • Property of the Estate: When a bankruptcy case is filed, an estate is created. Property of the estate is protected by the automatic stay....
    • Community Property: All interest of the debtor and the debtor's spouse in community property as of the commencement of the case that is
    • Pensions: (1) Except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes property of the estate under subsection...
  • Avoidance of Liens Security Debts Incurred in Divorce Proceeding: Notwithstanding any waiver of exemptions but subject to paragraph (3), the debtor may avoid the fixing of a lien on an interest of the debtor in property...

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Suggested Reading
Divorce & Money: How to Make the Best Financial Decisions
This book is a practical guide to evaluating assets during divorce. It explains how to determine the real value of marital property including houses, businesses, retirement plans and investments and how to negotiate a settlement that is fair to both sides.

Authors: Violet Woodhouse & Dale Fetherling

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TWO KINDS OF BANKRUPTCIES -- Individuals filing for bankruptcy choose one of two types, Chapter 7 and Chapter 13. Chapter 7, the so-called "straight bankruptcy," eliminates all dischargeable debt and stays on the debtor's credit report for 10 years, but the debtor emerges from the bankruptcy with a clean slate. Chapter 13 restructures debt so that the debtor takes a longer time to repay but he or she keeps some property, and it remains on the debtor's credit report for seven years.
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