June 10, 2020 | Bankruptcy, Chapter 13, Chapter 7, Divorce, Family Law, Law Firm News, Omaha Bankruptcy Lawyer

Money problems and financial stress can ruin a marriage – it’s one of the leading causes of divorce in the United States and the number one thing couples argue about. At the same time, divorce is one of the most common reasons spouses declare bankruptcy.

An understanding of bankruptcy law is helpful for any person considering filing for divorce who also is struggling financially.

Bankruptcy is a very powerful tool that may grant a discharge to certain types of debts resulting from a divorce.  Several important issues should be considered when contemplating a bankruptcy, including the impact of the automatic stay, the timing of the bankruptcy around a divorce proceeding, issues regarding expected property settlements, and possible modifications post-discharge. A retainer is not required for an initial consultation with family law attorneys and bankruptcy law attorneys at High & Younes.

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If you are considering divorce, bankruptcy – or both – speak to an experienced attorney to review your case and give you advice to achieve the best outcome possible.

The Omaha bankruptcy and divorce attorneys at High & Younes understand that this is a difficult time. Our team can help you and your spouse determine the best financial and personal move that will bring the most positive outcome for your family. Give our experienced lawyers at call at 402-933-3345 or visit our website to get started.

Debt and Divorce

There are several types of debts that may result from a divorce, including domestic support payments. That includes child support, alimony, day care and medical costs. In a Chapter 7 bankruptcy proceeding these obligations are never dischargeable.  Stated another way, domestic support obligations cannot be eliminated or modified in a bankruptcy proceeding.

Some debts resulting from a divorce decree are classified as property settlements – this is where things can get tricky. A property settlement may include the division of marital debt and division of assets.  For example, a judge in a divorce case may order one spouse to pay on a certain debt, such as a credit card or a loan.  If the divorce decree orders one spouse to pay on a debt that both spouses shared prior to the divorce proceeding, you MUST remember:

1. Your divorce decree is a set of instructions; it is not a shield.

Your ex-spouse may have been ordered to pay off the credit card you both shared.  What happens is that ex-spouse turns around and files bankruptcy?  If your ex-spouse files bankruptcy you may end up having to pay the debt.

To be clear, the creditor may not attempt to collect on the debt once a bankruptcy is filed.  However, once the bankruptcy case concludes the creditor may attempt to collect from the spouse who was NOT required to pay the debt per the divorce decree.  This scenario can have severe negative impacts on your financial outlook and your credit history.

2. If the creditor attempts to collect from the “non-filing spouse” (the spouse that did not file bankruptcy) that spouse may be able to pursue their ex- for compensation.

A spouse ordered to pay on a debt pursuant to a divorce decree, who then files bankruptcy, may be held in contempt of court.  He or she may be ordered to reimburse their ex-spouse for the money spent paying the debt off.  This, of course, requires more time going to court, more hearings, production of evidence, and legal fees.  It can be a tangled mess that, in most cases, could have been untangled much earlier with proper legal counsel.  If you are considering a divorce, a bankruptcy, or both, speak to an attorney to review your case.

3. Chapter 13 bankruptcy complicates the matter further.

In a Chapter 13 bankruptcy proceeding, the debts classified as support payments are not dischargeable, but those debts classified as property settlement payments are dischargeable.  Therefore, classification is important and quasi-support payments are problematic.

In bankruptcy, the spouse has two main attacks to prevent a discharge: (1) argue that the claim is in the nature of support; and/or, (2) that the case was not filed in good faith.

• Claim is the nature of support. In 2011, the 8^th Circuit Bankruptcy Appellate Court held that the crucial question is the function the award was intended to serve at the time of the agreement.  The Court used the following factors to determine whether a debt was considered a support obligation: (1) financial conditions of the parties at the time of the divorce, (2) employment histories, (3) the periodic nature of the payments and (4) sustainability of former spouse and children without the payments.  (In re Phegley, 443 BR 154).
• Case was not filed in good faith. In 2000, the 8^th Circuit Bankruptcy Appellate Court used the following factors to determine good faith under the totality of the circumstances: (1) nature of debt to be discharged; (2) whether the debt would be discharged in a 7; and (3) the debtor’s motivation and sincerity in seeking Chapter 13 relief. (In re Banks, 248 BR 799)

Divorce and bankruptcy often happen at the same time.  If you are contemplating either (or both) it is extremely important to discuss your options with an experienced and knowledgeable attorney. If you or your ex-spouse files bankruptcy, your fate may be altered as well.  High & Younes employs excellent family law and bankruptcy attorneys and they are available for a free initial consultation by telephone or in-person at our Omaha law firm.