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A bankruptcy case often happens after a divorce and law associated with each likewise often intersect.
Divorce is a complex and emotionally draining process. When bankruptcy enters the picture, it can add a whole new layer of confusion and concern. This is especially true when you thought your divorce was over and done with, all disputes settled and all properties divided and debt responsibilities determined.
If you are currently facing this situation, it’s crucial to gain a comprehensive understanding of the implications of your ex-spouse filing for bankruptcy.
In this Article, we will discuss how bankruptcy can impact your divorce proceedings (even after the fact), as well as the steps you can take to safeguard your interests.
However, first let’s discuss some basics about the bankruptcy process in Michigan.
Chapter 7 vs. Chapter 13 Bankruptcy
Before discussing the effects of bankruptcy on your divorce proceeding or judgment, let’s review the two primary types of bankruptcy typically filed by individuals: Chapter 7 and Chapter 13.
- Chapter 7 Bankruptcy
Also known as liquidation bankruptcy, Chapter 7 involves the debtor’s non-exempt assets being sold to repay his or her outstanding debts.
That sentence, however, is overly frightening in most cases. When you file for bankruptcy, everything that you own or have a right to or a claim to own, enters what is called “the Bankruptcy Estate.”
All assets of your Bankruptcy Estate must be itemized in your bankruptcy petition schedules before they are filed with the US Bankruptcy Court. Each asset or item of property must have its value likewise disclosed.
The US Bankruptcy Code and, in some cases, Michigan state law allow you to “exempt” (remove) certain assets from your Bankruptcy Estate if those assets do not outvalue the “exemption” (protection) provided to that type of property in the available statutes.
If an asset is totally exempted up to its full fair-market value, it is essentially removed from the Bankruptcy Estate. It cannot be seized and sold for the benefit of your creditors, as implied in that first sentence of this Section, above.
Most typical Chapter 7 debtors are able to fully exempt all, or nearly all, of their assets with the available statutory exemptions.
In either case, either some assets are liquidated or they are not. Any revenue generated is paid to your creditors by the Chapter 7 Trustee assigned to the case (who also does the property seizing and liquidating). Whatever you owe above that amount is totally discharged.
For present discussion purposes, it is worth noting that property that you have transferred prior to filing a Chapter 7 bankruptcy case may also be—in some cases—recovered by the Chapter 7 Trustee and liquidated.
Keep that in mind as you read further.
- Chapter 13 Bankruptcy
Chapter 13 is not a “liquidation” bankruptcy. No assets are seized or liquidated in Chapter 13. Instead, Chapter 13 is a “reorganization bankruptcy.” That is, in Chapter 13, you repay your debt according to your available net household average income over 3-5 years. Any unsecured debt (credit cards, medical debt, etc.) that is not fully repaid within this timeframe is generally totally discharged in balance.
In other words, in Chapter 13, you repay what you can afford to repay and discharge the rest.
Beyond that, however, Chapter 13 also allows you to pay “important” debts such as mortgage arrears and tax debts over “less important” debt such as old back rent obligations or credit card balance. You “reorganize” your debt repayment in this fashion in Chapter 13.
In Chapter 13 bankruptcy, even non-dischargeable debts can be repaid through the 3-5 year Chapter 13 payment plan.
Bankruptcy and Michigan Divorce Generally
Bankruptcy, as you may have divined, is a Federal legal process. Divorce, on the other hand, is a function of state law. Michigan circuit courts adjudicate divorce proceedings. Federal Bankruptcy Courts adjudicate bankruptcy cases.
In most cases involving debt and the right to assets in cases of indebtedness, the Federal Bankruptcy Code “preempts” (overrides) state law as to these questions. A state law-based contract or Michigan district court collections money judgment will not be collectible or enforceable once a Federal bankruptcy case is filed.
The Federal “automatic stay against collections” injunction that kicks in once a Chapter 7 or Chapter 13 bankruptcy case is filed will halt any collections of a debt with very few exceptions regardless of what a Michigan state court has had to say about it.
Divorce, however, does provide a couple of these exceptions. More on this below.
What about divorce in Michigan? How is a divorce case decided in state court?
Michigan follows an equitable distribution model when dividing marital assets and debts during divorce. This means that the court aims to distribute property and debts fairly, though not necessarily equally, based on various factors, including each spouse’s contributions, financial needs, and future prospects.
Based on this model, a Michigan divorce court will determine what assets or property is allotted to each of the two divorcing spouses, whether any support, alimony, or other obligation is to be paid, and how custody of minor children will be divided. (This latter question will be guided by a discussion of the best interests of the children, obviously, and not based on any “equitable distribution” theory. Children are not property.)
When bankruptcy comes into play, it can complicate the equitable distribution process, to say the least.
Bankruptcy Before vs. During vs. After a Divorce Is Finalized
The timing of your ex-spouse’s bankruptcy filing can have significant ramifications on your financial situation.
This Section will explore how a bankruptcy case filed before, during, or after the divorce is finalized can affect various aspects of your divorce and financial arrangements.
- Bankruptcy Filed Before Divorce: If your ex-spouse files for bankruptcy before the divorce is finalized, it can impact the division of marital assets and debts. The bankruptcy court’s automatic stay may halt the divorce proceedings temporarily, while the bankruptcy trustee assesses the debtor’s assets and liabilities.
- Bankruptcy Filed During Divorce: When bankruptcy is filed during the divorce process, it can complicate matters further. The bankruptcy court will need to determine which assets are part of the bankruptcy estate and which should be subject to the divorce settlement. This can lead to delays and legal complexities, necessitating careful coordination between the divorce and bankruptcy proceedings.
- Bankruptcy Filed After Divorce Finalized: If your ex-spouse files for bankruptcy after the divorce is finalized, it can impact any support obligations agreed upon during the divorce, such as child support or spousal support. Understanding the dischargeability of these obligations is crucial for both parties’ financial stability.
Joint Debt
When divorcing couples share joint debts, such as mortgages, car loans, or credit card debt, the bankruptcy filing of one spouse can significantly affect the other.
- Joint Debts in Chapter 7 Bankruptcy: In a Chapter 7 bankruptcy, the non-filing spouse may become solely responsible for joint debts, as the filing spouse’s obligations get discharged. This could lead to increased financial burden for the non-filing spouse.
- Joint Debts in Chapter 13 Bankruptcy: In a Chapter 13 bankruptcy, the automatic stay also applies to joint debts. The non-filing spouse might be protected from collection actions while the debtor develops a repayment plan. However, it’s essential to be aware that the non-filing spouse’s credit may still be impacted during this period.
Property Settlements
Dividing property and assets during divorce proceedings can become more complicated when bankruptcy is involved. Here’s what you should know:
- Marital Assets in Chapter 7 Bankruptcy: In Chapter 7 bankruptcy, the bankruptcy trustee may claim certain marital assets to sell and distribute the proceeds to creditors. This can affect the division of property during the divorce.
- Marital Assets in Chapter 13 Bankruptcy: In Chapter 13 bankruptcy, the debtor’s repayment plan might include payments to creditors using disposable income, which could impact the division of assets during the divorce.
- Protecting Assets: Understanding the exemptions available under bankruptcy and divorce laws is essential to safeguarding your assets and ensuring a fair property settlement.
Support Obligations
The financial support you or your ex-spouse may be entitled to receive, such as child support or spousal support, can be significantly impacted by bankruptcy. Here’s what you need to know:
- Non-Dischargeable Support Obligations: Certain support obligations are not dischargeable in bankruptcy, which means that the debtor remains responsible for these payments even after bankruptcy is finalized.
- Modifiable Support Obligations: In some cases, a change in financial circumstances due to bankruptcy may allow either party to seek a modification of support obligations.
Navigating the intersection of bankruptcy and divorce when support obligations are involved requires a thorough understanding of relevant laws and careful legal representation.
How to Respond to a Notice of Bankruptcy Filing by Your Ex-Spouse
If your ex-spouse files for bankruptcy during or after your divorce, you may receive a notice from the bankruptcy court. Knowing how to respond effectively is crucial to protecting your rights and interests. Here are the steps you should consider:
- Obtain Legal Advice: Consult with a knowledgeable bankruptcy and divorce attorney who can guide you through the process and help you understand your rights.
- Attend Creditor Meetings: As a creditor via support or other divorce judgment-originating financial obligations, you have the right to attend 341 Meetings of Creditors hearings to question the debtor (your Ex) regarding assets, income, expenses, and debts.
- Object if Necessary: If you believe your interests are not adequately represented or protected in the bankruptcy case, you may have the right to object or to retain experienced legal counsel to assist you with the filing of an “Adversary Proceeding” to contest the dischargeability of a divorce-related debt owed to you.
Michigan Bankruptcy and Divorce: The Bottom Line
Navigating the complexities of Michigan bankruptcy and divorce laws can be overwhelming, but remember that you don’t have to face it alone. Seeking guidance from experienced bankruptcy lawyers who specialize in divorce cases is the best way to protect your financial future.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully assisted thousands of Metro Detroit Chapter 7 and Chapter 13 clients with the bankruptcy process. If you are going through a divorce, or have recently been divorced, and are considering filing for bankruptcy, contact us now to schedule a free consultation.
