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Bankruptcy During a Divorce

Nothing stops a case quite so abruptly as your spouse filing a petition for bankruptcy. An automatic stay of all activity in your case is the first order the federal bankruptcy court makes. You’ll have to pry this legal monkey wrench out of the works before you can move your case along again.

It’s likely that all your property will be subject to any bankruptcy proceeding because usually everything you have is marital or community property. If your spouse has listed some of your separate property as marital or community in the schedule given to the court, you’ll have to prove to the satisfaction of the bankruptcy court that your property is yours alone. Be aware that the jurisdiction of the bankruptcy court is virtually unlimited; if it wanted to, it could require you to try your family law issues, such as separate versus community property disputes, there.

You need a bankruptcy attorney immediately. Because some family law attorneys may try to handle this themselves when they feel the issues are simple, be ready to question your attorney if he or she elects not to retain bankruptcy counsel.

The first thing you want is relief from the automatic stay. Normally, there isn’t any trouble getting the stay partially lifted, so you can continue with discovery, child custody, divorce and, on a limited basis, support matters.

Look carefully at the character—separate, marital/community—of the assets and liabilities your spouse listed in bankruptcy. Whether the assets are all community, or a mix, and whether the creditors listed are all community, or a mix, will indicate the direction you should go. If your spouse listed only community assets and community debts, you may want to join in the bankruptcy. You alone remain will remain liable on the balance of the joint debts once your spouse has discharged his or her liability for them in bankruptcy.

On the other hand, a significant portion of the debts may be your spouse’s separate obligations and you may have substantial separate property. You’re not interested in joining in the bankruptcy on these facts, but you will end up doing a lot of negotiating with joint creditors who now look to you for the balance.

Don’t expect to get back from your spouse any money you pay on the balance of a debt your spouse discharged in bankruptcy: the bankruptcy law is designed to let him or her wipe the slate clean. However, your family law judge can at least take into account the fact that your spouse has an increased ability to pay support, or a decreased need for support, as a result of the bankruptcy.