Many Americans have debts of all kinds, whether it be student loan debt, credit card debt, auto loan debt, etc. Individuals who encounter unexpected financial setbacks often fall behind on paying their debts, which begins the unpleasant collections process. For debts that are truly insurmountable, bankruptcy offers debtors a fresh start by allowing them to liquidate their debts or create a more manageable payment plan. However, bankruptcy filings affect all areas of the debtor’s financial life — including property division in a divorce. 

What Is Bankruptcy?

Bankruptcy is a legal proceeding that provides relief for individuals who cannot afford to pay their debts. Upon the conclusion of the bankruptcy proceedings, the debtor is relieved of his or her prior financial obligations. There are two types of bankruptcy actions for individual filers in the United States, each named for their respective chapters in the U.S. Bankruptcy Code: Chapter 7 and Chapter 13. 

  • Chapter 7: With Chapter 7 bankruptcy, the bankruptcy trustee liquidates certain of the debtor’s assets to pay the debtor’s debts. Unsecured debts (those not backed by collateral, such as credit card debt, student loan debt, and child support payments) are paid first, followed by secured debts (those backed by collateral, such as mortgages and auto loans). After the creditors have been paid to the greatest extent that they can, most of the rest of the debtor’s debts are discharged. 
  • Chapter 13: With Chapter 13 bankruptcy (also known as a wage earner’s plan), the debtor’s debts are not completely discharged. Rather, the debtor enters into a court-approved reorganization of his or her finances. As part of this reorganization, the debtor must agree to a plan to repay his or her creditors within three to five years on an installment basis. 

Both types of bankruptcy feature the automatic stay — a court order that stops most collections actions currently being taken against the debtor. The automatic stay is a key feature of bankruptcy protection, as it allows debtors some “breathing room” while they determine their next steps. It stops or delays many types of adverse actions against debtors, such as foreclosures and evictions, utility disconnections, and wage garnishments. 

How a Spouse’s Bankruptcy Filing Affects Property Division in a Divorce

A bankruptcy filing affects the division of property in a divorce primarily through the automatic stay. While the automatic stay does not operate as a stay on the proceedings for the dissolution of the marriage, it does prevent the division of property. This is because the assets of the debtor — including joint marital property — become part of the bankruptcy estate. Thus, a bankruptcy filing in most cases will significantly lengthen the term of the divorce proceedings. 

Contact the Woodstock Divorce Lawyers at Hait & Kuhn for More Information

If you are going through a divorce and considering filing for bankruptcy, you should contact an attorney to discuss its potential implications for your assets. To get started, please contact the Woodstock divorce lawyers at Hait & Kuhn by using our online form or calling us at either of our metro Atlanta locations: Woodstock (678-888-0198) or Alpharetta (770-517-0045).