Bankruptcy During Divorce
Problems may result from the conflict of interests between domestic relations courts and bankruptcy courts when a couple files for bankruptcy during a divorce. The conflict arises because of the differing policies between the courts. Bankruptcy courts have a policy of providing a fresh start and distributing the debtors' assets equally among all of their creditors. Family courts have a policy of equitably dividing the property between the spouses.
Property Division Comes to Halt until Bankruptcy Proceedings are Complete
When a couple is in the process of a divorce and one or both spouses file for bankruptcy, then the property division aspects of a divorce proceeding stop until the bankruptcy proceedings are complete. This occurs because domestic relations actions generally fall within the broad language of the automatic stay provided upon the filing of a bankruptcy case. The divorce court can still award custody, visitation, child support, alimony, and even grant the divorce.
Characterization of Obligations
Courts must determine whether existing obligations constitute alimony or a property settlement. Many times divorce courts do not designate whether a particular marital debt represents a division of property, alimony, or a combination of the two. Federal bankruptcy courts separate debts that constitute property settlements from those that are maintenance, support, and alimony to determine which debts are dischargeable.
Dischargeable and Nondischargeable Debts Related to Divorce Proceedings
Bankruptcy courts may discharge certain debts related to property settlements. Property settlement debts are typically discharged but maintenance, support, or alimony debts are not typically discharged.
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