Many attorneys specialize their practice in order to better serve their clients. While concentrating on a particular practice area can help attorneys focus on making themselves the best in their field, sometimes it causes them to lose sight of the bigger picture. Divorce cases do not occur in a vacuum. When divorcing spouses face financial troubles it is important to consider the possibility of a bankruptcy and how this could affect the different aspects of a divorce.
We have put together this list of four important facts that divorce attorneys should be aware of, to help them better assist their clients who may also be facing a bankruptcy (or have a spouse who may be forced to file for bankruptcy).
Fact #4: Jurisdiction over Your Assets
When a Debtor files for Bankruptcy, they submit their assets to the jurisdiction of the Bankruptcy Court. This means that when a Debtor files for bankruptcy during a divorce case, the assets that would normally be divided in a divorce case are first subject to the jurisdiction of the Bankruptcy Court. While some assets may be joint, the spouse is merely considered another creditor with rights to the joint property that may be subject to the rights of other creditors as well.
A Bankruptcy Judge may allow the Divorce Court to make decisions relating to the division of property, but this is at their discretion, and the Bankruptcy Judge also has the right to make these decisions directly. This power applies even if the divorce has already become final. The bankruptcy laws allow the trustee to take back any items which were transfered up to two years prior to the bankruptcy filing if the transfer was not for fair value (11 U.S.C. § 548(a)(1)) or up to one year prior to the bankruptcy filing if the transfer was to an insider (11 U.S.C. § 547(b)(4)(B)). This means that the Bankruptcy Court can undo a Separation Agreement or Judgment of Divorce in favor of transferring assets from the ex-spouse to other creditors.
Finally, it is important to understand that filing for bankruptcy means that a debtor gives up their rights to decide what happens to their non-exempt assets. The bankruptcy trustee stands in the shoes of the debtor. This means that they can settle a divorce case giving up any rights the debtor may have in their spouse's property. The duty of the trustee is to the creditors not to the debtor.
These are all important consequences of filing for bankruptcy that should be considered when a bankruptcy is filed during or after a divorce case. If you are in a divorce or were recently divorced make sure you discuss this with your bankruptcy attorney. If you are getting divorced and considering bankruptcy, make sure your divorce attorney understands the consequences of filing bankruptcy or consults with a bankruptcy attorney.
Click here to read Fact #3: Jurisdiction over Your Debts.