Divorce & Bankruptcy: Things You Need to Know

If you are going through divorce and bankruptcy proceedings simultaneously, or intend to file for bankruptcy immediately after your divorce, there are some important things you need to know.

As a Maryland bankruptcy attorney, I see too many people file for bankruptcy in Maryland – or intending to file – as a way to get out of paying alimony or child support. Some attempt to use bankruptcy to delay or overturn a divorce ruling or property division ruling of some sort. Unfortunately for these individuals, bankruptcy will not provide them with relief from these obligations. However, there are many good reasons to file for bankruptcy after or during a divorce, such as instances in which alimony or child support is difficult to pay because of other debts or when debts incurred through property division make it difficult to keep up with other obligations.

Because issues concerning spousal support (alimony or maintenance), child support and property division can get a little sticky during bankruptcy, consider the following points before deciding to file for bankruptcy in Maryland. Most of these points will also apply to divorce and bankruptcy in other states as well since many of the relevant laws are federal laws rather than state laws.

6 Important Things to Know About Bankruptcy and Divorce

1. Bankruptcy Won’t Relieve Domestic Support Obligations
   Domestic support obligations include alimony, spousal support, maintenance, child support or any payments or debts you owe as a form of support for a child or former spouse. If you are ordered to make support payments of any type bankruptcy proceedings will not stop collection of those payments —past-due amounts cannot be discharged and current payments must continue to be made. You will owe your support obligation and must continue to make payments during and after your bankruptcy. For more information about domestic support obligations as they pertain to bankruptcy, please our article on “Can Alimony and Child Support Be Discharged In Bankruptcy?”
2. Bankruptcy’s Automatic Stay Won’t Stop Most Domestic Relations Proceedings
   When a person files for bankruptcy in Maryland (or any other U.S. state) an automatic stay goes into effect on collection of all debts. It also stops foreclosures, repossessions and other collection efforts. However, the automatic stay will not stop proceedings in domestic relations cases, including divorce and child custody cases, unless the proceeding affects the debtor’s estate (see next paragraph). Divorce hearings, custody hearings, visitation scheduling and all other matters of divorce or custody will move forward without interruption when bankruptcy is filed.
3. Automatic Stay May Halt Domestic Proceedings Relating to Support Issues and Division of Property
   While a bankruptcy’s automatic stay won’t affect divorce and custody hearings, it will stop all proceedings and negotiations regarding property division and matters that will affect the debtor’s estate. Additionally, all payments of support that arise from property of the bankruptcy estate, such as a jointly owned house going to the ex-spouse or wages garnished for child support, will also be stayed. In most cases, the state court handling the divorce will ask the bankruptcy court to lift the stay so that matters will move forward and, in most cases, the bankruptcy will grant the request and lift the stay. However, in cases where the debtor’s ability to pay creditors may be affected by property division rulings or support orders, the bankruptcy may refuse to lift the stay until the bankruptcy trustee has had an opportunity to review the situation and reach an agreement with the state court. For example, if the debtor spouse receives significant income from an investment portfolio and interest in that portfolio is likely to be transferred to the non-debtor spouse in the divorce, the bankruptcy court may intervene because creditors could be paid out of that portfolio.
4. All Claims Arising from Domestic Relations Proceedings Must be Filed with Bankruptcy Court
   All claims that the non-debtor spouse has to property or income of the debtor spouse that arise out of support orders or property division orders/settlements must be recorded with the bankruptcy court. For example, real estate previously owned by the debtor (or jointly owned) that is going to the non-debtor spouse in divorce must be recorded with the bankruptcy court. Once bankruptcy is filed, all assets of the debtor spouse belong to the debtor’s bankruptcy estate and are in the charge of the bankruptcy trustee until either paid to a creditor or returned to the debtor as exempt from bankruptcy. The non-debtor spouse will also have to provide proof, in the form of court order or settlement agreement, that he/she has a claim against the debtor. Failure to file the claim could result in forfeiture of some of the assets or payments due to the non-debtor spouse.
5. Bankruptcy is Not a Means of Retrying or Overturning Rulings in Domestic Relations Cases
   In my time as a Maryland bankruptcy attorney, I’ve occasionally seen individuals attempt to use bankruptcy as a way to get a new ruling on property division or support orders. The debtor files bankruptcy with the belief that the bankruptcy court will prevent assets from going to the non-debtor spouse so it can be used to pay creditors or that the bankruptcy court will change the amount of child support or alimony due in order to have more money to pay creditors, or some scenario of that sort. That is not the purpose of bankruptcy court and bankruptcy court does not have the authority to change support orders or overrule state courts on matters of property division.
6. Pension Support Awards to Non-Debtor Spouse May be Dischargeable in Bankruptcy Under Certain Conditions
   It is not uncommon in a divorce case for the state court to award one spouse with a share of interest in the other spouse’s pension. The court enters a Qualified Domestic Relations Order (QDRO) to achieve this. Usually a pension award of this sort is interpreted as a form of support, and if the spouse with the pension files bankruptcy that spouse is unable to discharge the non-debtor spouse’s share of the pension as an unsecured debt. However, in some cases, if the debtor spouse files for bankruptcy before the QDRO is entered, it may be possible to discharge the award of pension interest as an unsecured debt. The Maryland bankruptcy court has not ruled on this issue yet, so it is still an open question and different courts and judges within the state may rule differently.

Get help with divorce and bankruptcy issues

If you are going through divorce or are divorced and are considering filing for bankruptcy in Maryland, as a bankruptcy attorney I can help you determine whether bankruptcy is the right course of action for you and whether it is likely to achieve the goals you have. Call our office at 301-441-8780 to schedule an appointment.