Here’s a great article with information on bankruptcy and it’s effects on divorce. For more information on bankruptcy and divorce issues, don’t miss my next teleseminar this month, “Bankruptcy Basics and How to Avoid Being Burned in Divorce" with Christine Stadler, divorce and bankruptcy attorney.  February 25, 2009 7:00 pm.  Details for sign-up to be posted soon.

Bankruptcy During Divorce (posted at Lawyers.com)

by Sherrie Bennett

If you think you’re headed for divorce and have a lot of debt between the two of you, it might make sense to file for bankruptcy before starting a legal divorce proceeding. Filing bankruptcy first can simplify the divorce by clearing out some of your debt. This can make it easier to negotiate how the remaining debts should be divided, and protect you from your soon-to-be-ex’s bankruptcy filing down the road. Also, you and your spouse might want to consider filing a joint bankruptcy before the divorce. Not only will this make the final division of any remaining debts even easier, but filing a joint bankruptcy is cheaper than filing two separate ones. In either event, bankruptcies and divorces have serious impacts on each other, especially with respect to your property and personal finances.

Effect of Bankruptcy on Divorce

When one or both spouses file bankruptcy, all the community property, that is, property that was bought or acquired during the course of the marriage, becomes a part of the bankruptcy estate and is available to pay debts. The bankruptcy estate is simply all of your property that you own at the time the bankruptcy is filed.

When you or your spouse file a bankruptcy, an automatic stay immediately prevents creditors from collecting on most debts. But the automatic stay doesn’t prevent you from asking a divorce court to order your spouse to pay child support or alimony. Once a bankruptcy court decides property is "exempt," that is, it is not part of the bankruptcy estate and so it is not available to be sold to pay debts, a divorce court can then divide that property.  Property exemptions are defined not only by federal law (the "Bankruptcy Code"), but also by the laws of the state in which the bankruptcy is filed.

Some examples of federal exemptions include:

    * A specified dollar amount for real property that is for his or her residence, and

     * A specified dollar amount for one motor vehicle, such as your primary car.

Property Settlements and Bankruptcy

Negotiating a property settlement in the midst of bankruptcy is complicated. Debts related to a property settlement are presumed to be "nondischargeable" in bankruptcy, meaning that the person who files bankruptcy can’t have those debts wiped out and must still be responsible for them.

But the bankruptcy court will wipe out those debts if the person filing for bankruptcy can show:

    * That he or she can’t pay the debt and still take care of him or herself and any dependents, or

     * That wiping out the debt would result in a benefit to the person filing the bankruptcy that outweighs any harm done to his or her former spouse or child by nonpayment.

So if you think your spouse is contemplating bankruptcy after your divorce is final, you’ll want to word your property settlement in such a way that your soon-to-be-ex’s obligation looks and acts as much as possible like a support obligation instead of a property settlement. That is so simply because support obligations are more difficult to have discharged.

How do bankruptcy courts decide what’s support and what’s property settlement? It varies greatly by state, but courts have based their decisions on such questions as:

    * Does the obligation terminate or reduce with the occurrence of certain events, like remarriage or a child turning 18?

    * Is the obligation in installments or a lump sum?

     * Are there minor children? * What is the relative health and education of the parties?

    * Was there a need for support at the time of the divorce?

If your bankruptcy hasn’t been filed yet, these distinctions and problems probably won’t effect you. For many bankruptcies filed on or after October 17, 2005, any obligation between former spouses can’t be dischargedin bankruptcy. So, a spouse with an alimony and/or child support obligation can’t have that obligation discharged in bankruptcy if the bankruptcy petition was filed on or after October 17, 2005.

Property Liens

One way to protect yourself in a divorce negotiation if you think your spouse may be contemplating bankruptcy in the future is to take a security lien as a backup to debts your spouse is to pay you after the divorce. The lien should be on property your spouse is to be awarded in the divorce, preferably property that means a lot to your spouse. That way, if your spouse later asks the bankruptcy court to discharge the debt he or she is supposed to pay, you can seize the property to pay the debt.

Indemnity Clauses

Another precaution in the face of a soon-to-be-ex-spouse talking about bankruptcy is to have a "hold harmless" or "indemnity" clause written into the divorce decree, requiring your spouse to pay certain debts or repay you if a creditor makes you pay the debt. If your ex-spouse later files bankruptcy, you can go to bankruptcy court and ask the judge to enforce the indemnity agreement. While an indemnity agreement won’t guarantee you’ll get paid, it’s one more factor for the bankruptcy judge to consider.

As you can see, the issues of going through divorce and bankruptcy at the same time are confusing at best, and highly damaging at worst. If you find yourself in this position, it makes sense to find a bankruptcy lawyer who can help you with all the issues.