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Bankruptcy and Insolvency

Either of these events is traumatic enough; together bankruptcy and divorce can be overwhelming.

Certainly one of the primary drivers of divorce is financial issues. When confronted by unresolved and mounting financial obligations and the prospect of terminating a marriage, there are several decisions that must be made that have a direct impact on the resolution of the matters.

Certainly, the first consideration is what comes first, or is it simultaneous? There is not a simple answer to that question. Much will depend on state law as it relates to equitable distribution. It is critical to have a firm understanding of the obligations that are outstanding and who is liable for them, as well as any underlying collateral. Please note that in many divorces it is not clear who should be ultimately responsible for the outstanding debts, the husband, the wife, or some equitable division between the two. To the extent it is determinable who is responsible for the debts, this information will provide your advisor with the information necessary to see if there is an advantage to timing the filing for bankruptcy, and if both spouses need to file. It is helpful in this situation if the divorcing couple can work together; however, there are many situations where the spouses find themselves on different sides of the fence as to whether to file for bankruptcy. Those situations may require each spouse to retain separate advisors.

A bankruptcy filing before a divorce action would result in the resolution of the obligations of the couple. However, all of the couple’s assets, except for exempt assets, would become part of the bankruptcy estate, and would become subject to the claims of creditors. Equitable distribution is subject to the automatic stay of the bankruptcy court; however, exempt assets are not. The automatic stay is what prevents creditors from enforcing any rights they may have during the pendency of the bankruptcy. This will not prevent a divorce court from entertaining the payment of child support or alimony.

For questions or further assistance, please contact a member of Withum’s Forensic and Valuation Services Group.

The bankruptcy code underwent a makeover in 2005 when the concept of “Domestic Support Obligations” (DSO) was redefined. The new act distinguished between property settlements and support obligations. DSOs get a first priority in the distribution of assets from the bankruptcy estate ahead of all creditors, except the Trustee and professionals, while property settlements can receive a discharge in some circumstances in a Chapter 13 filing. To add teeth to the requirements for the payment of DSOs, depending on the chapter of the code filed under, the bankruptcy can be dismissed, or can only be confirmed when full payment is a component of the reorganization plan, and post-filing payments are current. Further debts for alimony, maintenance and support are nondischargable in all bankruptcy filings regardless of the chapter.

A thorough understanding of your options and the issues that confront you are critical for successfully navigating this landscape.

Forensic and Valuation Services

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