Chapter 13 Bankruptcy During A Divorce

If you've recently filed for a Chapter 13 bankruptcy, you may be in the process of giving yourself a fresh financial start in life. However, because Chapter 13 bankruptcy can take years to complete, other circumstances in your life might change during the bankruptcy process.

If you're considering filing for divorce during a Chapter 13 bankruptcy, here are some things to keep in mind.

Creditor and Debtor Dilemma

If your divorce proceedings leave your spouse owing you money (or vice versa) and one or both of you are in the process of completing a Chapter 13 bankruptcy, you are in a creditor and debtor dilemma.

Settling Up: In this debtor/creditor dilemma, there are a number of steps you and your former spouse can take to settle up the score. Although Chapter 13 bankruptcy can not supersede child custody or alimony agreements dictated by your divorce settlement, you might be able to absolve the financial obligation by deeding over property. For instance, if you become your former spouse's creditor via a Chapter 13 bankruptcy, they can settle their debt by deeding property or other assets left over from the divorce proceedings. In this example, however, you will need to make sure that the property deeded to you is free of other claims (tax or other creditors). This can be particularly important if your spouse is deeding property related to a shared business venture or holding.

Avoiding the Slowdown

Chapter 13 bankruptcy adds an additional layer to dissolving shared assets. Although you might not be able to avoid a partial delay, you can help expedite the process by making a few strategic decisions.

Preemptive Division: The easiest way to avoid having your divorce proceeding delayed by a Chapter 13 bankruptcy is to divide your shared assets before you or your spouse file for bankruptcy. By dividing your assets preemptively, your divorce proceedings can be completed even if you and/or your spouse have a pending Chapter 13 bankruptcy. In some states, this can be accomplished via a post-nuptial agreement (or pre-nuptial, if you had that in place at the time of your marriage). Consulting an attorney about the particular Chapter 13 bankruptcy regulations in your state might be the first step you should take.

Disposable Income

During a Chapter 13 bankruptcy, your attorney can negotiate for basic living expenses. These living expenses are designed to allow you to maintain an "acceptable" income to maintain your "normal" life.

Keeping the Cashflow: Because a Chapter 13 bankruptcy can impact your financial obligations, the stipulated monthly living stipend by the court can be garnished by any alimony and/or child support mandated through your divorce. You can gain some leverage over these impingements on your living stipend by including the alimony and/or child support obligations in your Chapter 13 bankruptcy. If your attorney can persuade the court that these obligations are part of your critical monthly "needs," the court may allocate some additional funds to make up for any potential sort falls. After all, you can pay child support and/or alimony if you don't have the funds to maintain a normal lifestyle.

Scholastic Sources

If you and/or your spouse have accrued shared debt related to loans for educational purposes and/or you've created savings accounts for future educational purposes, you might have some tough choices to make.

Savings: If you've set aside funds for your dependents' future academic endeavors, you should ask the courts to hold these funds in a trust. Although you and your former spouse will not be able to access these funds in the trust until your dependents reach particular education milestones (high school, college, etc.), the funds you've saved will likely be left unscathed.

Debts: Unlike credit card debt, college loans are often brought into a marriage, not generated during the marriage. If this is the case, you might be able to file paperwork with the court to shift all or significant portion of the debt to your former spouse if they took the loan out before you were married.

Contact a Chapter 13 bankruptcy lawyer for more information.