Bankruptcy can help strained finances after divorce

Going through divorce can take a toll on people's finances. As people split, they often face juggling increased expenses with decreased income. People may have to adjust to living on reduced incomes as the same amount of income which previously supported one household must now support two. In many cases, people find themselves falling further and further behind on paying their bills and feel scared and depressed and overwhelmed. People who have gone through divorce should be aware of some of the debt relief possibilities available by filing bankruptcy.

Options for debt relief

In many cases, when the court divides property in a divorce property settlement, the court allocates marital debt between the parties as well as the couple's assets. With the economy's still slow recovery after the Great Recession which began in or around 2008, debt is the often the only thing remaining between the spouses to divide in many divorces.

Filing bankruptcy may help to deal with the management of debts that after a divorce. Chapter 7 bankruptcy in some instances can be a solution, as it could allow a person to discharge certain (dischargeable) debts which might include past due credit card bills, medical debt, unsecured loans or unpaid utilities. However, a Chapter 7 discharge excludes "Domestic Support Obligations" defined by the Bankruptcy Code such as alimony and child support or other court ordered payments.

In most instances, a Chapter 7 Debtor may retain all of his or her assets. Sometimes a Chapter 7 is referred to as a liquidation bankruptcy, but despite the name, it is typically only a person's non-exempt assets that are sold in order to pay claims owed to creditors. The exemption laws which govern what property is to be claimed as exempt from the reach of creditors are liberal. As such, most individuals who file for relief under the provisions of Chapter 7 have no assets which can be liquidated, and they are able to retain their possessions. Before filing for bankruptcy, a person should consult with a lawyer who is knowledgeable and specializes in bankruptcy, as that person will be able to assist in determining if personal assets will be lost in the case of a Chapter 7 filing.

Chapter 13 is another option which may be appropriate for a person with financial difficulties but who does not qualify for Chapter 7 due to income or because they may have non-exempt assets which they would like to retain. Chapter 13 is also an excellent solution to be considered by those who may have fallen behind on mortgage payments, have outstanding tax obligations or have defaulted in making the required alimony or child support payments. A Chapter 13 bankruptcy filing can also be useful for those who are looking to save their homes from foreclosure.

The filing of a bankruptcy acts to create an automatic stay which immediately halts the foreclosure sale proceedings (subject to certain limitations which may not enable the automatic stay to go into effect) as well as wage garnishments, repossessions and collection activities. A Chapter 13 filing provides a repayment period of up to 60 months of time to become current with past due mortgage payments, Domestic Support Obligations, tax obligations, car payments, etc. Chapter 13 also enables a person to address credit card bills, utility bills, medical debt and other unsecured loans so that a fresh start may be obtained after completion of the Chapter 13 Wage Earner Plan payments and the resulting entry of a discharge.

Bankruptcy and spousal support

Not all debts may be discharged in bankruptcy. Among other obligations, bankruptcy law prohibits the discharge of "Domestic Support Obligations," which includes alimony and child support and may also include other payment obligations ordered to be paid to or on behalf of a former spouse or dependant. However, even with spousal support obligations that cannot be discharged, many individuals who have gone through a divorce can benefit from a bankruptcy solution. As noted above, a Chapter 13 repayment plan may be a tool with which a person can get caught up on the repayment of past due alimony or back child support payments they owe to their ex-spouses. After the repayment plan is completed, and assuming that the Domestic Support Obligations have been paid during the course of the proceedings, the court issues an order and the debtor is discharged from the dischargeable debts. After a Chapter 13 discharge is obtained, a person should be in a better financial position to make support payments in the future and avoid the stresses of debt collection while trying to keep current with payments due for alimony or child support.

Those who file Chapter 7 bankruptcy will not receive a discharge of any unpaid alimony or child support debts. However, when people discharge their other debts in bankruptcy, it should be easier for people to pay what they owe.

Speak with an attorney

Dealing with debt after the stresses of a divorce can seem overwhelming. Even though the time immediately following divorce can be difficult for people, they do not have to struggle with finances alone. People dealing with debt after divorce should seek the assistance of an attorney knowledgeable about how bankruptcy and divorce interact who can discuss the debt relief options available with them.