When a married person files for chapter 13 bankruptcy, it is usually a smart move to include their spouse and file a joint petition. Chapter 13 bankruptcy locks in assets and disposable income for a period of 3 or 5 years. It can be used to address secured and priority debts- both individual and marital debts- that would be unchanged by filing for chapter 7 bankruptcy. It can be ideal when a household needs to stop a home foreclosure, child support wage garnishment, and other forms of collection attached to secured and priority debts. But a couple should consider a chapter 13 filing carefully if their marriage is on shaky ground. Divorce can be delayed for years if pursued in the midst of a chapter 13 bankruptcy case. What should a couple do if they separate while in an active chapter 13 payment plan? Read on for legal strategies that could help, and to discuss how they could apply to your situation with an experienced chapter 13 bankruptcy attorney, call 602-609-7000 for your free phone consultation today.
Tough It Out
In some situations, it simply may be best for a married couple to delay a divorce filing and continue with their chapter 13 payments until the case is discharged. A bankruptcy attorney could be forced to withdraw from a chapter 13 case if their clients divorce due to a conflict of interest. Both the status of the bankruptcy case and the marriage affect whether this is a viable option. Let’s say the couple was in a five-year payment plan, and they’ve completed four years and eight months of payments. Here, the simplest thing to do may be to wait four more months before initiating divorce proceedings. But if they are only a year and a half into the plan and have a contentious relationship, devising another plan may help them accomplish their breakup and debt relief goals.
Bifurcate The Case
Bifurcate means to split into two, and in some instances, the court will allow joint bankruptcy debtors to do exactly that. When a married couple files for divorce, they no longer have the same legal interests, so proceeding with the same bankruptcy petition with the same bankruptcy lawyer is difficult. When a case is bifurcated, each will have their own representation and proceed with separate payment plans based on their new living situations. The spouses must be able to afford chapter 13 payment plans separately to execute a case bifurcation. This is most often true when their original payment plan was set to pay off a significant amount of unsecured debt.
Modify The Payment Plan
Instead of severing the case into two, sometimes it is better for divorcing spouses to modify but keep the same joint chapter 13 bankruptcy case. This allows the couple to retain the benefits unique to Chapter 13 bankruptcy while adjusting their payments to be affordable given their new living situation(s). Whatever that new living situation may be, the debtors still must have sufficient income to pay costs and secured and priority debts, given their disposable income, to qualify for a plan modification. This strategy typically works best when the debtors were planning to pay a significant amount of unsecured debt in their chapter 13 plan. Otherwise, there may not be enough room in their budgets to run two households and continue with chapter 13.
Convert To Chapter 7
Converting a joint chapter 13 case to chapter 7 bankruptcy can be a beneficial plan under certain circumstances. This may depend on whether the couple filed for chapter 13 bankruptcy because they didn’t qualify for chapter 7, or because their debts would be better served by chapter 13. If they fall into the former situation, divorce and splitting households could change their income enough that they now qualify for a joint chapter 7 bankruptcy case. This clears their unsecured debts together, and is typically discharged within 3 to 6 months. At this point, the couple can get divorced, with one less issue to resolve in property division. But this is still a waiting period of several months, and chapter 7 bankruptcy doesn’t clear secured and priority debts. To navigate this process and explore your options, contact an experienced chapter 7 bankruptcy lawyer to guide you through the legal complexities.
Dismiss & Divorce
In some instances, divorce must be prioritized over bankruptcy. Examples include when domestic violence is present, when one or both spouses urgently want to remarry, religious reasons, etc. If there is too much time left on the payment plan to wait, the spouses can consider voluntarily dismissing their joint chapter 13 bankruptcy case. All spouses have to do to end a joint chapter 13 case is stop making their payments. This ends the payment plan and the protections from the automatic stay, but it allows the spouses to divorce and achieve whatever goals go along with that. One or both spouses may decide to refile an individual bankruptcy case after their divorce has been finalized. That may be either as chapter 7 or chapter 13, depending on their goals. Either spouse may no longer feel the need for bankruptcy, depending on their debt structure and overall financial situation.
Community vs. Separate Debt
Understanding the difference between community property debt and separate property debt could impact how you handle divorce during chapter 13 bankruptcy. Arizona is a community property state, so any debts acquired during the marriage are considered both spouses’ responsibility, and they must be split during property division like the couple’s assets. Even if the debt is only in one spouse’s name, it is considered community property if it was acquired during marriage. Any debt acquired before marriage and after a petition for divorce or legal separation has been filed are separate property debts.
In property division, one spouse may agree to take on full responsibility for community property debts, usually in exchange for some benefit such as ownership of a disputed asset. Creditors don’t have to follow family law orders in the pursuit of debt collection. If one spouse individually clears their obligation to pay a community property debt in bankruptcy, that creditor is likely to pursue the other spouse for payment, regardless of what the divorce orders say. This is an important consideration for spouses considering converting from joint to individual bankruptcy.
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Debtors should always seek legal guidance before filing a bankruptcy petition, but this is even more true if it is under chapter 13 and there could be issues such as divorce on the horizon. When a bankruptcy case is dismissed, it halts the automatic stay, leaving the debtor vulnerable to their creditors, and it could be limited if the case is refiled. There are countless other issues that could arise during the course of a chapter 13 payment plan. Be prepared for all of them by retaining skilled legal counsel for your case. Arizona Zero Down Bankruptcy Lawyers offers free consultations by phone and competitive payment options to make clearing burdensome debts more affordable. Want to learn more about your options, with provisions for divorce and other potential life changes in the future? Call 602-609-7000 for your free consultation today.
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