Family law clients often find themselves fighting on several 'fronts', figuratively speaking. In addition to the dissolution of their marriage, the financial consequences of their marriage ending may necessitate filing for bankruptcy protection. Alternatively, many spouses fight so bitterly over past financial decisions that the need for a bankruptcy filing leads to a divorce.
Although the two legal actions are often seen occurring at or around the same time, it is important to note that divorce is a legal action taken exclusively in state courts, while bankruptcy law is federally-based. The result is that bankruptcy actions interfere with the progress of divorce actions more than the reverse.
What's the most important issues to understand if you're dealing with these issues?
1) When a bankruptcy is filed, a stay is entered, greatly reducing the state court's ability to enter judgments with respect to the ownership of property owned by the bankruptcy filer. One could greatly delay the property-related aspects of their divorce proceeding with an ill-timed bankruptcy filing.
A 'stay' is a halting of further advancement of a legal proceeding until a particular matter that requires resolution has been resolved to the Court's satisfaction. In the case of divorce and bankruptcy, a stay may be entered regarding the property of the debtor until the bankruptcy case has been concluded.
2) Filing for divorce solely in order to qualify for Chapter 7 bankruptcy, rather than Chapter 13 bankruptcy, is a big no-no with both state and federal courts. This is what is known as a 'sham divorce.' If the the circuit judge presiding over a divorce thinks that the parties are only divorcing for reasons related to favorable bankruptcy protection, they may dismiss the case. Similarly, a bankruptcy trustee has a duty to investigate the reasons behind a divorce that is filed soon before a bankruptcy petition.
3) the non-debtor spouse, or put another way, the spouse who has not filed for bankruptcy may need to file certain types of claims as a potential creditor in the debtor spouse's bankruptcy case in order to preserve their interests in the marital estate. It is very important to consult with an attorney about this topic if you are involved in a divorce and your spouse has recently filed for bankruptcy, or has indicated that they intend to do so.