How Will it Affect Me if My Husband Is Going to File for Bankruptcy Before We Divorce in California?

By Mary Jane Freeman

Your husband's decision to file for bankruptcy, either before you file for divorce or before your divorce is final, can negatively affect you in several different ways. Because California considers property acquired during the marriage to be shared marital property, family assets may be seized to pay your husband's debts; creditors also will come after you for all marital debts since his liability will be discharged by the bankruptcy. Your husband can even discharge his obligations under an existing property settlement agreement.

Chapter 7 vs. Chapter 13

California debtors typically file for Chapter 7 or Chapter 13 bankruptcy. With Chapter 7 bankruptcy, your husband will be required to give up all of his nonexempt assets, which are liquidated to pay his creditors. By contrast, Chapter 13 generally will not require your husband to give up any property. Instead, he'll enter into a repayment plan that lasts three to five years. If any of your husband's debts remain unpaid at the conclusion of either plan, they will be discharged, and he will no longer be held responsible for them.

Community Property

California is a community property state. This means any property you or your husband acquired after you married is considered your joint property, commonly referred to as marital property, with each of you enjoying a 50 percent share. However, any property you acquired individually before the marriage, or during the marriage by inheritance or gift, is considered separate property. If your husband files for Chapter 7 bankruptcy, he is required to give up all property he owns or has an interest in, which includes marital property despite the fact that you own 50 percent of it.

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Co-Debtor Stay

When your husband files for bankruptcy, an automatic stay immediately goes into effect. This stay prohibits creditors from engaging in collection activity against your spouse while the bankruptcy case is underway. If your husband files for Chapter 7 bankruptcy, this stay will not extend to you. This means creditors will attempt to collect all marital debts from you, including any marital loans you may have co-signed such as a mortgage. These collection efforts will continue even after your husband receives a discharge, because his creditors will no longer be able to legally pursue him for payment. However, if your spouse files for Chapter 13 bankruptcy, the automatic stay will extend to you in the form of a co-debtor stay. Unfortunately, the stay ends when the bankruptcy is discharged. When this happens, the collection activity is likely to resume, unless your husband paid off all marital debts through the repayment plan.

Impact During Divorce

If your husband files for bankruptcy before the divorce is filed or finalized, it may stall or delay the divorce proceedings. This is because family courts are limited in what they can do while a federal bankruptcy is pending. Courts cannot adequately assess property ownership and debt issues until the bankruptcy case has concluded. Until then, there is too much uncertainty. Alimony and child support awards also may be delayed for this reason since courts typically consider the final property allocation between spouses when making these orders.

Impact After Divorce

If your divorce has been finalized, your husband's bankruptcy could possibly affect the enforceability of the divorce decree. In the case of Chapter 13, some marital debts can be discharged, specifically property settlements. For this reason, it's important to include indemnity language in the marital settlement agreement for protection. Domestic support obligations, like alimony and child support, are never discharged.

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Bankruptcy During Divorce Proceedings

References

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What Does a Discharge in a Chapter 13 Bankruptcy Mean to Debtors?

Bankruptcy allows a debtor to obtain relief from his creditors if he meets certain legal requirements. Chapter 7 bankruptcy is a liquidation of assets, while Chapter 13 bankruptcy involves repayment of some, or all, of the debt owed. If a debtor’s income is above the state median income and he has enough disposable income to repay his debt, Chapter 7 is not an option. In both types of bankruptcy, there eventually is a discharge of debt.

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