How Does Bankruptcy Impact Divorce Proceedings?

How Does Bankruptcy Impact Divorce Proceedings?

The Automatic Stay & Bankruptcy Discharge

Bankruptcy cases are under the jurisdiction of U.S. federal courts. When you file for bankruptcy, federal law grants certain legal protections for you. One of the most important protections afforded by bankruptcy proceedings is known as the “automatic stay.”

After you file for bankruptcy, creditors may not file a legal action against you to collect on debts you owe them. Federal law “stays” any legal action for the collection of certain debts pending resolution of your bankruptcy case.

The bankruptcy stay makes it easier for the bankruptcy court to sort through your outstanding obligations and organize how to repay your creditors. In Chapter 7 cases—also known as “liquidation” cases—the court appoints someone, known as a “trustee in bankruptcy,” to gather your assets to see if they can be sold to satisfy any of your outstanding debts. In Chapter 13 cases—also known as “reorganization” cases—you develop a plan to repay some of your creditors based on your current level of income.

The automatic stay in bankruptcy provides petitioners with powerful protection against being driven into further debt, enjoining a broad range of legal actions regarding the payment or collection of the petitioner’s outstanding liabilities.

For example, the automatic stay can prevent a utility company from shutting off service for a twenty-day period. A petitioner can further delay utility disconnection if they provide the utility operator with adequate assurance of payment. Importantly, the automatic stay halts eviction and foreclosure proceedings. However, the automatic stay does not apply to certain important legal actions, such as criminal matters, tax proceedings, and certain family law obligations regarding domestic support.

The other significant type of relief that bankruptcy provides involves the discharge of certain debts upon resolution of the petitioner’s bankruptcy proceedings.

During bankruptcy proceedings, the petitioner or bankruptcy trustee is supposedly repaying priority creditors. Sometimes the bankruptcy trustee cannot liquidate enough assets to repay the petitioner’s creditors in a Chapter 7 case. Or, a repayment plan under a Chapter 13 case cannot reasonably cover all outstanding debts.

Nevertheless, the conclusion of bankruptcy proceedings results is the discharge of most remaining outstanding debts. Creditors who could not recovery payments from the petitioner are therefore out of luck by the time proceedings conclude.

However, like the automatic stay, bankruptcy does not discharge all debts upon the conclusion of legal proceedings. Important liabilities, such as student loans, tax debts, and legal damages arising from the petitioner’s tortious or criminal acts, will not get wiped by the otherwise broad remedy of discharge that bankruptcy provides.

Bankruptcy and Property Division Issues

When a couple gets divorced, it triggers various legal proceedings. First, a court determines whether the divorce petitioner has complied with the basic requirements for legally dissolving their marriage. This merely requires the court to consider evidence proving that the parties were legally married and that their case falls into one of the legally recognized grounds for divorce.

In addition, a court must resolve issues concerning the division of marital property, the appropriateness of awarding spousal support, the arrangement of child custody, and the calculation of child support if applicable.

The automatic stay in bankruptcy can halt legal proceedings regarding the equitable distribution of marital assets and liabilities as those issues have the potential to affect a spouse’s financial rights and obligations. However, the automatic stay will not stop the underlying divorce proceeding.

Bankruptcy and Domestic Support Issues

Neither the automatic stay or bankruptcy discharge applies to debts arising from the petitioner’s obligation to pay spousal and child support. Because the petitioner’s former spouse and child’s livelihood may depend on domestic support payments, proceedings regarding the determination, modification, and enforcement of domestic support obligations are beyond the scope of the automatic stay and discharge relief of bankruptcy.

Call The Virga Law Firm, P.A. for Quality Legal Counsel

If you are in the middle of a family law dispute in Florida, you should consult an experienced attorney from The Virga Law Firm, P.A. for legal advice. We have years of collective experience regarding Florida family law matters, including issues implicating child and spousal support.

Call us at (800) 822-5170 or contact our office online to schedule an initial consultation today.