Bankruptcy & Litigation Series: #1 Divorce

When a bankruptcy is filed, the automatic stay precludes creditors from proceeding in lawsuits against the debtor. If a bankruptcy is filed during a divorce case, the automatic stay applies to the divorce case as well.

The divorce Judge may proceed on issues of child support, alimony and custody of children, but may not make any decisions relating to the division of assets and debts without the permission of the bankruptcy court, and any decisions made by the divorce Judge are reviewable by the bankruptcy Judge.

Therefore, it is very important to consider the right timing of a bankruptcy and a divorce when a client will likely have to go through both process.

Filing Divorce First: Finishing the divorce action before beginning the bankruptcy filing allows the divorce action to proceed to its natural conclusion without interruption by the bankruptcy court. It is still possible, though, for the Bankruptcy Court to undo the Agreement or Judgment of the Divorce Court if it appears the parties were attempting to defraud creditors (for instance if all of the assets were transferred to the non-debtor spouse rather split equitably). Despite this risk, it is unlikely if the division is equitable that there would be any issue, and both cases would like proceed more smoothly one after the other, rather than simultaneously.

However, the debtor might be bound to make payments in the divorce case which could affect eligibility for bankruptcy, and might have made promises to divide property that is now an issue.  Domestic Relations Orders are non-dischargeable in most cases and therefore the decisions made in a divorce settlement, will have significant impact on what can and can't be discharged in the bankruptcy.  This is even further complicated by joint debts.  It's therefore important to have bankruptcy counsel review a potential divorce settlement prior even if the intention is to complete the divorce case first.

Filing Bankruptcy First: Likewise, there are certain circumstances where it might make more sense to file for bankruptcy prior to filing the divorce. For instance in a case where both spouses had significant debt, they can file as joint debtors so long as they are still married. Even if only one of the parties intended to file, there is a case which suggests that some of the protections for the debtor extend to the non-debtor spouse (protections that might not apply if the parties are already divorced).

The facts of each case will control whether it makes sense to file the bankruptcy or divorce first.  If you are assisting a client with a divorce case but don't have expertise in bankruptcy we recommend reviewing your strategy with an attorney trained in bankruptcy.  The terms of the proposed property settlement or transfers of property under the agreement may be hurtful to your bankruptcy case if your client plans on filing for bankruptcy shortly after the conclusion of the divorce matter. These issues are even more complicated when a Chapter 13 plan is in place, because a divorce can cause problems with making plan payments.  Having an attorney that can explain the bankruptcy consequences of the decisions made during the divorce will be critical in helping your client get a fresh start.

Bankruptcy & Other Litigation: A Ten Part Series

A bankruptcy case can impact other litigation in many ways.  Some cases will be halted automatically by the filing of a bankruptcy due to the automatic stay.  Others might not be stopped, but might not be controlled by the bankruptcy trustee.  And some cases may not be affected at all.  Navigating these interactions can be difficult even for attorneys who are experts in other areas of the law if they don't practice in the bankruptcy court.

The next ten posts will outline how bankruptcy cases can interact and may affect different types of litigation.  In the following posts we will cover how a bankruptcy case can affect or be affected by these types of cases:

#1: Divorce
#2: Post-Divorce
#3: Collections - Plaintiff Bankruptcy
#4: Collections - Defendant Bankruptcy
#5: Evictions - Landlord Bankruptcy
#6: Evictions - Tenant Bankruptcy
#7: Foreclosures
#8: Personal Injury & Torts - Plaintiff Bankruptcy
#9: Personal Injury & Torts - Defendant Bankruptcy
#10: Criminal Cases

What to do when you receive a Notice of Bankruptcy? Step 3: Identify Deadlines.

If you receive a Notice of Bankruptcy, it will contain certain deadlines and meeting dates.  The sample below shows where some of those deadlines will appear:

These dates are important because they limit what you can and cannot do in a case, and if you miss any of these deadlines you may have given up your rights to make certain objections or claims.  You should read the Notice carefully to make sure you understand all of the information contained therein.  To highlight some of these limits we have indicated them with red arrows in the sample Notice above.

Some of the important dates and limitations that appear on the Notice are as follows, in descending order as they appear on the Notice:

The date of filing:  This is the date that the debtors case was filed with the court and some of the other dates will depend on this date.

The meeting of creditors:  This is the date that the Section 341 Meeting of Creditors is first scheduled to take place.  The Creditor's Meeting is scheduled about 30 to 45 days after the bankruptcy petition is filed. At least seven days before this meeting, the debtor is required to provide to the trustee and any creditor requesting it a copy of their most recently filed tax returns and proof of income for the most recent 90-day period. The court-appointed Chapter 7 trustee will preside over this meeting. At the meeting, which the debtor is required to attend, the debtor will be asked to testify under oath as to the accuracy of the statements in the petition. Creditors have a right to attend this meeting and ask questions, though they are not required to.

Deadline to object to discharge or to challenge the dischargeability of certain debts:  
A creditor may object to the discharge of amounts owed to them by the debtor under certain circumstances. If a creditor objects to the discharge of any of the debts listed in the petition or schedules, such objection must be raised within 60 days after the first scheduled §341(a) Meeting of Creditors.  If you do not raise such an objection in a timely manner you risk waiving that right and having any such debt discharged.

Deadline to object to exemptions:  Certain property claimed by the debtor to be exempt (not reachable by creditors), may be claimed as exempt in error.  If that is the case, then that property might be used to pay creditors.  Once the §341(a) Meeting is concluded, creditors only have 30 days to object to these exemptions after which the trustee may (and likely will) release all of this exempted property back to the debtor.

Deadline for financial management course:  The debtor must take a financial management course within 60 days after the first scheduled §341(a) Meeting of Creditors, and if they don't they might not receive their discharge.

Automatic Stay: Immediately upon the filing date, an automatic stay prevents creditors from taking certain actions against the debtor.  If you violate the automatic stay you may be subject to sanctions and fines by the bankruptcy court.  You should ensure that you do not take any action against the debtor after the filing date without consulting with a bankruptcy attorney to ensure that you are not violating the automatic stay.

There may be other deadlines in cases that are different from the Chapter 7 no asset case in our example.  For example, in a case with assets there will also be a deadline for filing a Proof of Claim.    To ensure that you know all of the deadlines and meeting dates read your Notice carefully.

Once you understand what your deadlines are, the next step is to identify: What is your exposure to liability if the debtor receives their discharge?