What Happens to Chapter 13 During a Divorce?

By Beverly Bird

A Chapter 13 bankruptcy filing isn’t a quick or simple procedure. You’re not eliminating your debts as you would in a Chapter 7 proceeding. Instead, you enter into a court-supervised plan to pay your creditors at least a portion of what you owe them. Chapter 13 repayment plans usually last three to five years. If your marriage is in trouble, that could be a very long time. If you and your spouse have filed jointly for Chapter 13 protection, bankruptcy law can lock you together post-divorce, but you have some options.

Dismissing the Plan

Unlike with Chapter 7 bankruptcies, debtors have the right to voluntarily cancel or dismiss their Chapter 13 proceedings. If you and your spouse have filed jointly for Chapter 13 protection and you now want to part ways, you can pull the plug on your bankruptcy case. However, the debts you and your spouse accumulated together and which you’ve been repaying are still there. If you dismiss your bankruptcy case, you and your spouse are obligated to pay the debts in their entirety, based on terms set by your creditors and not the bankruptcy court. A divorce court will apportion these debts between you just as if you had never filed for bankruptcy, or you can negotiate a divorce settlement on your own, addressing who will pay for what.

Restructuring the Plan

The U.S. Bankruptcy Code also allows you to bifurcate your Chapter 13 bankruptcy plan, essentially dividing it into two cases -- one for you and one for your spouse. This might be a viable option if your own income, without adding in your spouse's income, is low enough to qualify for Chapter 7 protection instead. If you file for Chapter 7 protection, you can eliminate your debt entirely rather than repay it. In this case, you could convert your half of the Chapter 13 plan to a Chapter 7 proceeding. Alternatively, you and your spouse could each proceed with Chapter 13 plans separately. If you choose to do this, the bankruptcy court divides your debts, not a divorce judge. The bankruptcy court would also have to approve any marital settlement agreement you and your spouse negotiate insofar as the agreement addresses your debts.

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Maintaining the Plan

You can also maintain your Chapter 13 plan post-divorce if your divorce is amicable enough. The bankruptcy court would have to approve your decision and it would also have jurisdiction over the property and debt aspects of your divorce. Just as if you bifurcated your bankruptcy case, you’d continue to have protection against collection efforts from your creditors. Your divorce decree or settlement agreement must include provisions for your Chapter 13 payments.

Attorney Conflicts

If you decide to continue with your bankruptcy proceedings, either by bifurcating your case or by maintaining your original Chapter 13 plan, either you or your spouse may lose your bankruptcy attorney. In general, an attorney can’t ethically represent both of you once you become adversaries in another lawsuit such as your divorce. If you decide to dismiss your Chapter 13 plan, you can usually start over by filing a new bankruptcy petition on your own, either for Chapter 7 or Chapter 13. If you choose this option and don’t want to hire a new bankruptcy attorney, you can file for bankruptcy through an online document-drafting service such as LegalZoom.

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Bankruptcy During Divorce Proceedings
 

References

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