previously posted about the many issues that can arise when a bankruptcy happens at the same times as a divorce, what happens if a bankruptcy is filed after the divorce is final?
If a Bankruptcy action is filed immediately after the divorce becomes final it is possible for the Bankruptcy Court to undo the Agreement or Judgment of the Divorce Court if it appears the parties were attempting to defraud creditors (for instance if all of the assets were transferred to the non-debtor spouse rather than split equitably). If the division is equitable, though, then it is unlikely that the Bankruptcy Court would want to revisit the divorce division.
However, the debtor might be bound to make payments in the divorce case which could affect eligibility for bankruptcy, and might have made promises to divide property that is now an issue. Domestic Relations Orders are non-dischargeable in most cases and therefore the decisions made in a divorce settlement, will have significant impact on what can and can't be discharged in the bankruptcy. There are three main areas where a bankruptcy can affect or be affected by a divorce judgment: property division issues, support issues, and joint debts.
Property Division Issues in a Post-Divorce Bankruptcy:
If a divorce judgement requires that certain property be transferred from the debtor to their ex-spouse then the bankruptcy could affect that transfer. If the transfer is made within 1 year prior to the bankruptcy then this could be considered a transfer to an insider and if it is not for fair value (for instance if the property division was not equitable), then the bankruptcy court can, upon motion of the trustee, require that the property be returned to the debtor's estate.
If the transfer hasn't been made yet, then that property is included in the debtor spouse's bankruptcy estate and the ex-spouse becomes another creditor of the estate. Whether they take priority or not will depend on the nature of the property to be divided, and whether their claim is a non-dischargable domestic relations order or not. Domestic relations orders are treated slightly differently for Chapter 7 and Chapter 13 bankruptcies, so the type of bankruptcy that is filed may also affect whether the property transfer is required or not.
Usually a failure to transfer property required by a Divorce Judgment would subject the debtor spouse to a Complaint for Contempt in the Probate & Family Court. However, the Bankruptcy Court takes precedence and the Automatic Stay prevents creditors (even ex-spouses) from proceeding in other courts without first getting the permission of the Bankruptcy Court.
Support Issues in a Post-Divorce Bankruptcy:
Alimony and Child Support are considered Domestic Support Obligations, which are non-dischargable and must be paid by the debtor in a bankruptcy. Any child support or alimony arrears are non-discharable in a bankruptcy and take priority over other debts. In addition, if the family court awards the costs and attorneys fees of collecting alimony and child support in a Contempt action, those debts are non-dischargable as well. In a Chapter 13, arrears may be paid overtime as part of the plan, but in a Chapter 7 they remain due immediately.
Practically speaking, going through a bankruptcy, might gain a debtor spouse some leeway from the Probate & Family Court in obtaining a payment plan for payback of the arrears, but they will still need to be paid. If the ongoing support order itself is incorrect or onerous, this cannot be changed in the Bankruptcy Court, but can still be revisited by the Probate & Family Court by the filing of a Complaint for Modification.
If the debtor spouse is receiving child support or alimony this counts towards their income for bankruptcy means test purposes. If it is owed but is not being paid then it does not need to be included, though the arrears may be an asset that should be listed.
Joint Debt Issues in a Post-Divorce Bankruptcy:
Post-Divorce there may be debts for which both parties are liable to the creditor but one or the other party has agreed (or been ordered) as part of the divorce to pay these debts. Some typical examples of joint debts are home mortgages, joint credit cards, joint tax debt, and co-signed car loans. If a joint debt is not paid off in the divorce, then from the creditor's perspective it is still owed by both parties. If the divorce judgment requires one spouse to pay the debt and they do not make payment, it will affect both spouse's credit and the creditor can come after either or both of them to collect. The spouse who was supposed to be protected in the divorce can likely file a Complaint for Contempt against the other spouse but this won't undo any credit damage and doesn't stop the collection action by the creditor.
In a Bankruptcy, the debtor is required to list co-debtors and the Bankruptcy Court can discharge debts to the third party creditor. Whether or not the obligation of a debtor spouse to their ex-spouse is also discharged will depend on whether or not it is considered a domestic support obligation or non-dischargable domestic relations order. It is likely important for the ex-spouse to participate in the bankruptcy and file a Proof of Claim if they believe there is an obligation to them as well as the creditor. However, it is also important to note that even if a debt is non-dischargable, as a practical matter it may still be difficult to collect. A debtor with no assets, found in Contempt in the Probate & Family Court, may not be able to pay the joint debt and the creditor will still pursue the non-bankrupt spouse. It is therefore important to anticipate potential issues such as this at the time of the divorce, especially if it is obvious that one spouse's budget will not allow them to pay the bills they are agreeing to pay.