Bankruptcy Divorce Settlement

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Bankruptcy can hamper a divorce settlement by many modes. The assets and pension of the bankrupt are treated differently. The bankruptcy court concentrates on wiping out the debts.

Nature of Bankruptcy Divorce Settlement

A bankrupt person is not the owner of most of his / her assets. Rather, the Trustee in the bankruptcy owns these assets. As a consequence of this, the collection of assets that can be divided in a divorce settlement is decreased. Thus, the bankruptcy affects the bankrupt's spouse.

As an example, assume that a matrimonial house is jointly owned by the bankrupt and his / her spouse. Now, unless the Trustee gives his / her consent, it is not possible to transfer this house in the sole name of the spouse.

The major portion of the income and savings of the bankrupt belong to the Trustee. These are used to discharge the debts. So, it is very unlikely that the bankrupt is capable of offering any spousal support or lump sum amount to the spouse.

Considering the above facts, some individuals take a decision to make themselves bankrupt. Their intention is to delay or frustrate their spouse's claims in the divorce settlement.

The pension of the bankrupt is not vested to the Trustee. Bankruptcy cannot affect the rights of a Family Court to issue pension sharing orders of the bankrupt's pensions.

Bankruptcy Divorce Settlement Impact

Consider a situation in which one or both divorcing partners have filed for bankruptcy. All the property that these partners own when the bankruptcy was filed is regarded as a part of the bankruptcy estate. This can be used for payment of debts.

The bankruptcy court has the right to declare that a particular property is exempt i.e. it cannot be regarded as a section of the bankruptcy estate. Consequently, this property cannot be sold to repay the debts. Now, the divorce court can divide this exempt property. The Federal Law (Bankruptcy Code) and the laws of the state define Property exemptions.

When a person files for bankruptcy, an automatic stay is implemented as per which creditors cannot collect most of the debts. In spite of this stay, one spouse can request the divorce court to issue orders regarding payment of alimony or child support

If a property settlement is related to some debts, these are considered as "Non dischargeable" in bankruptcy. This implies that the individual who files for bankruptcy is responsible for these debts and cannot wipe them out. However, if this individual can prove the following facts, the bankruptcy court would wipe out the debts.

• It is not possible for him / her to repay the debt and still manage himself / herself and his / her dependents, or
• If the debt is wiped out, it would result in a benefit for this individual that is far important than any harm done to the ex spouse or child due to non payment

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