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Divorce and Bankruptcy

Information About Divorce and Bankruptcy

1. Collection of Joint Debts Against The Spouse Who Does Not File Bankruptcy

If one spouse files for bankruptcy and obtains a discharge of a debt owed by both spouses, the creditor is likely to pursue collection of the debt against the non-filing spouse. Even though the divorce decree may state that one of the parties is obligated to pay the debt, the creditor can still try to collect the debt against the spouse who did not file bankruptcy.

2. Priority of Alimony, Maintenance and Support Debts

The 2005 amendments to the bankruptcy law created a term called a “Domestic Support Obligation,” referred to as a “DSO.” A creditor who is owed a DSO now has more rights and remedies. A person who owes a DSO now has much less ability to escape that obligation by filing bankruptcy. Debts that are DSO’s are not eliminated (“dischargeable”) in a Chapter 7 or a Chapter 13 bankruptcy. DSO’s have first priority status in a Chapter 13 bankruptcy. A court may not grant a discharge in a Chapter 13 bankruptcy unless the debtor certifies that the debtor is current on all post-petition DSO payments. Bankruptcy trustees must inform DSO claimants about the resources available to them to collect their claims and of their rights under the Bankruptcy Code.

3. Discharge of Divorce Obligations

Since the 2005 amendments, debts for divorce property settlements owed by one spouse to the other spouse, to a former spouse, or to child cannot be discharged in a Chapter 7 bankruptcy. However, this rule does not apply to Chapter 13 cases. If a debtor completes a Chapter 13 bankruptcy repayment plan, that debtor can successfully discharge a property settlement debt (that is not a DSO) owed to his or her former spouse.

4. Automatic Stay

Once a bankruptcy case is filed, the automatic stay goes into effect and protects the debtor against most collection actions. Most lawsuits and other actions to collect a debt cannot proceed without permission from the Bankruptcy Court. The 2005 amendments created many exceptions relating to divorce cases. Now most divorce cases can proceed, except actions to collect property from the bankruptcy estate or actions to establish a property settlement. If a person is contemplating a divorce and is facing overwhelming financial problems, he or she should consider consulting with a bankruptcy attorney to assist in the development of an overall plan to alleviate the family and financial difficulties. If a couple is divorcing it is often necessary for each spouse to have separate bankruptcy counsel.

The information contained herein is for educational and informational purposes and is not legal advice.