Divorce is a life-changing event that can be emotionally and financially overwhelming. Adding bankruptcy to the mix can make the divorce process even more complicated. Usually, divorce is considered one of the main reasons for filing for bankruptcy, as it can cause financial difficulties for the divorcing parties. If you are planning bankruptcy in addition to divorce, you should seek legal advice from our skilled lawyers at Sacramento Bankruptcy Lawyer. All our lawyers have vast experience handling bankruptcy cases in Roseville.

How California Bankruptcy Affects Divorce

When you file for bankruptcy, all operations related to your assets and debts are frozen until the bankruptcy process is complete. If the divorce process is ongoing, assets cannot be divided until the bankruptcy process is over. When you file for bankruptcy, all your assets, including community property, become part of your bankruptcy estate. This bankruptcy estate is used to pay off debts to creditors before the bankruptcy process is complete. Therefore, the divorce court cannot divide your assets until the bankruptcy court finalizes your property issues.

Filing For Bankruptcy Before Divorce

If you and your spouse have significant debt, you can agree to file for bankruptcy before filing for divorce. In a divorce proceeding in California, the spouses divide community debts and assets equally. However, in the case of bankruptcy, the court will only pay your share of the debt if you file bankruptcy alone. If you jointly own a debt with your spouse, your spouse will still be obligated to pay a portion of the debt to the creditor even after you pay off part of the debt in bankruptcy. Therefore, it often makes sense to file for joint bankruptcy before filing for divorce so that both proceedings can be handled efficiently and the divorce proceedings can proceed without delay.

Consequences If One Party Files For Bankruptcy During Divorce

One party can have a motive to annoy the other party or have debts discharged without letting their partner know. Perhaps the spouse who files for bankruptcy wants to live debt-free, but the other spouse is unaware. If one of the partners declares bankruptcy, their family's assets can be liquidated to pay off their share of the debt. Therefore, the other partner must pay off all of the remaining debts, as one partner will have been released from the debts. This can have devastating consequences for one partner, as he/she will be left with hefty debts to pay on top of the pain of the divorce.

Chapter 7 Or Chapter 13 Bankruptcy In California

Most debtors file for bankruptcy under either Chapter 7 or Chapter 13. Under Chapter 7, a married couple or partner filing for bankruptcy must give up all non-exempt property or assets. These assets are disposed of to pay off debts to creditors. On the other hand, if a spouse or couple files Chapter 13 bankruptcy, the spouse or couple is not expected to turn over assets for liquidation. Instead, spouses or couples must come up with a repayment plan. This plan must be acceptable to your creditors.

Typically, the repayment plan allows you to continue paying the debts for 3 to 5 years, meeting the agreed-upon monthly payments. If one partner declares bankruptcy without the other partner, the debt will be discharged at the end of either bankruptcy plan. Discharge means that your spouse is not responsible for the debts outstanding.

According to the community property law, a couple divides their assets and debts equally in divorce. However, if your spouse files for Chapter 7 bankruptcy, they must give up all the property they own. This means the other partner's share also repays the debt. If one partner succeeds in this and the debt is not paid in full, the other partner automatically becomes solely responsible for the obligation. This can be very unfair to the other party, primarily if they did not directly repay the debt.

An automatic stay sets in when a partner files for Chapter 7 bankruptcy. A stay typically prevents creditors from collecting unpaid money from a person while the bankruptcy proceeding is ongoing. Unfortunately, the moratorium does not apply to the other spouse, so the creditor can still collect payment from the spouse. The creditor's claim continues even if the other party receives debt forgiveness.

If one spouse files for Chapter 13 bankruptcy, the other spouse's stay will be extended as a co-debtor. However, once the bankruptcy is lifted, the stay will be lifted, and creditors will resume collecting unpaid debts from the partner who did not declare bankruptcy.

Choose Chapter 7 To Resolve Your Divorce Faster

Chapter 7 bankruptcy follows a more straightforward process with a faster timeline. You can expect to have all payable debts cleared within six months. Therefore, divorce proceedings can commence or restart after bankruptcy is complete.

Chapter 13 bankruptcy, on the other hand, requires debt restructuring and a repayment plan that creditors must approve. The process will take more time and can prolong the divorce settlement.

The Bankruptcy Trustee And The Divorce Process

When a couple divorces and owns property, everything is divided equally, including debts. However, if one partner files for bankruptcy and is declared insolvent, the court cannot transfer property or assets to the other partner as compensation after divorce proceedings. Once bankruptcy is declared, a trustee is appointed to handle the bankruptcy proceedings.

Just because you file for bankruptcy does not necessarily mean you will not be able to repay your debts. The trustee will manage your property or anything you own with your partner. Property cannot go to other partners without the trustee's permission. In this case, the trustee manages the bankrupt's assets and income. The trustee pays creditors to whom the bankrupt owes money.

Therefore, after bankruptcy is declared, creditors have priority. Special consideration can apply if there are children in the equation. Another effect of bankruptcy on a divorce proceeding is that the appointed trustee can ask the court to examine records of transactions that took place five years before the filing and divorce. The purpose of the investigation is to prevent bankrupt individuals from transferring their property to family or friends. An insolvent person can anticipate being declared bankrupt and decide to transfer some of their assets to someone else to protect themselves. Trustees assume that any assets transferred in these circumstances are normally undervalued and that the purpose is to defraud lenders of their funds.

During an impending divorce, one spouse can file for bankruptcy to annoy the other partner. In this case, unless the filing party is bankrupt, the other party can apply to the court to cancel the bankruptcy. Under the Insolvency Act 1986, the court can set aside a bankruptcy order under Section 282.

How Various Assets Are Affected By Bankruptcy During Divorce

Property acquired during the marriage is community property, but spouses can also own property that is not community property. Before marriage, a person's property and debts are not part of the marital property or assets. When partners or couples file for bankruptcy during a divorce, knowing what assets are involved is essential.

If one partner is bankrupt, this bankruptcy status will not affect the other partner's property, just their property. The condition and type of the property determine whether the creditor takes ownership of all or part of the property when recovering debts.

Irrespective of whether spouses file for bankruptcy jointly or individually, creditors can claim the total amount of the community property. In other cases, creditors can only receive half of the non-bankrupt spouse's assets. A creditor can demand that particular property be sold to collect the debt, and the remainder goes to the divorcing couple. It is essential to understand that debts or assets present before the marriage are unclaimable for a joint debt.

Only property and debts acquired during the marriage are affected when a divorcing couple files for bankruptcy. If one party files for bankruptcy and is declared insolvent, only community property is used to pay off the debt. Therefore, the other party will not be penalized for property that only they own. A spouse can own real estate separately, but only if it was present before the marriage or if the partner received it as a gift or inheritance from friends or relatives.

How Bankruptcy Affects Alimony and Child Support

As mentioned above, not all debts are dischargeable through bankruptcy. For example, child support and alimony payments are still payable whether a spouse files for Chapter 13 or Chapter 7 bankruptcy. Even if a spouse is declared bankrupt, their obligations to their spouse and children continue.

If the court orders your spouse to pay alimony or maintenance despite the bankruptcy order, the set amount will not change. Additionally, a parent's bankruptcy does not affect custody of the child. However, other expenses incurred during or after the divorce can be reimbursed.

Debts Not Affected by Bankruptcy During and After Divorce

Divorcing couples can file for bankruptcy to discharge pre-separation obligations. However, not all debts can be paid off or forgiven. In bankruptcy proceedings, some of a couple's debts are nondischargeable. These debts, excluding child support and alimony, are:

• Money owed to the government — Government entities that you owe money to must be paid, regardless of bankruptcy. If debts to a government agency are jointly owned, the couple must pay the debt regardless of divorce or bankruptcy.
• Student loans — In some cases, couples can jointly take out student loans to help their children study or to allow them to continue their studies. The spouses must repay the student loans if they decide to divorce and file for divorce, regardless of whether the loans benefit one person or the child. The couple can have to sell shared assets to offset the loan.
• Court fines and penalties — You cannot avoid court fines or penalties through bankruptcy.
• Lawyer fees for child custody cases — This debt is not dischargeable even if your spouse files for bankruptcy.

The above debts are nondischargeable even if one of the partners is declared bankrupt and the other partner incurs other debts. Both spouses remain responsible for the debt.

Paying Spouse's Lawyer's Fees After Bankruptcy

In many divorce cases, one spouse must pay the other spouse's lawyer's fees. In most cases, the husband pays the payments on behalf of his wife, but in some cases, the court can order the wife to pay. If the spouse required to pay is declared bankrupt, lawyer fees can be listed as a debt to be discharged. This means the other spouse will have to pay the legal fees on behalf of the bankrupt spouse.

However, an ex-spouse can challenge this decision in court. In these cases, the court must determine whether the lawyer's fees are classified as child support or property compensation. If the court determines that a lawyer's fees are a maintenance debt, they cannot be discharged and must be paid by the party.

In the case of a property settlement, the payment must be from the couple's joint assets if the ex-spouse does not object to the application. However, the court can waive the bankrupt spouse's lawyer fees. In this case, the other spouse is automatically responsible.

Effects of Filing For Bankruptcy Immediately After Divorce

An ex-spouse can file for bankruptcy immediately after divorce. The move can cause concerns for the other spouse about the court's willingness and ability to enforce the divorce decree. Fortunately, you do not have to worry about that. Under Section 523 of the Bankruptcy Code, a support order cannot be issued regardless of whether the person has filed for Chapter 7 or Chapter 13. Similarly, a Chapter 7 bankruptcy cannot discharge your debts to your ex-spouse. However, this does not mean that you should relax and not question your ex-spouse's' bankruptcy attempts. Courts interpret bankruptcy laws differently, and ignoring them can affect your rights.

Impact of Bankruptcy on Retirement Accounts and Joint Real Estate

If you file for bankruptcy as an individual, your spouse's assets and debts are usually not affected. The trustee will take over your non-exempt assets under Chapter 7 bankruptcy but cannot seize your spouse's assets.

Shared land, real estate, and other assets can make bankruptcy and divorce even more complicated. You might need to sell your community property so that the trustee can take over your community property in the event of bankruptcy.

The good news is that California bankruptcy protects retirement accounts and pensions significantly. For most types of retirement plans, forgiveness from creditors is unlimited. This means that the total amount of these retirement accounts is protected in bankruptcy. The fully protected retirement plans include 401Ks, 403Bs, Keogh's, employee pensions, stock bonus plans, profit-sharing plans, fund purchase plans, defined benefit plans, and government-deferred benefit plans.

However, IRAs (including conventional and Roth IRAs) exempt creditors only up to certain limits in the event of bankruptcy. This limit is relatively high (more than $1 million per person when adjusted every three years). Veterans' benefits and Social Security are exempt from bankruptcy under federal law, which also applies to California residents.

How a Bankruptcy Lawyer Can Help

Divorce and bankruptcy are intertwined. Even when divorce no longer ties you to your spouse, you are still responsible for several obligations that bind you to one another. If the court orders your spouse to continue paying a particular debt, the court can come after you if your spouse fails to pay. You could be surprised to find a credit card company contacting you and requiring you to pay a credit card debt your spouse was supposed to clear. If you choose to ignore bankruptcy issues just because you have finalized the divorce, you can end up facing detrimental consequences later on.

A bankruptcy lawyer comes in handy even after finalizing your divorce to help you secure the most suitable debt relief. A lawyer will consider your unique financial situation and recommend the best remedy. If any unexpected bankruptcy issues crop up even after the divorce is complete, you will always have someone you can consult.

Under California law, hiring a lawyer for divorce and bankruptcy is not mandatory. However, choosing to represent yourself can have detrimental consequences. It is best to seek the help of a legal expert who understands how the process works. Going through bankruptcy and divorce alone can be overwhelming; you should let a lawyer handle all the complicated bits on your behalf.

Find a Sacramento Bankruptcy Lawyer Near Me

Divorce can be messy, especially when it comes to finances and children. When a couple gets married, everything they do is considered acceptable to the other person. For example, it does not matter if a married man accumulates credit card debt without his wife's knowledge; the wife is also responsible. Divorce can be very acrimonious, and one partner can decide to file for bankruptcy without informing the other partner. The other spouse will bear any debts incurred during the marriage. With an experienced bankruptcy lawyer, the bankruptcy and divorce processes can be much easier. At the Sacramento Bankruptcy Lawyer, we have passionate lawyers who can guide you through the process in Roseville. Contact us at 916-800-7690 to speak to one of our lawyers.