From The Sections, 0419 WYBJ, Vol. 42 No. 3. 14

• Author: Jennifer M. Salisbury, Secretary/ Treasurer Bankruptcy & Creditors’ Rights Section
• Position: Vol. 42 3 Pg. 14

From the Sections

Vol. 42 No. 3 Pg. 14

Wyoming Bar Journal

April, 2019

The

Rough Waters of Divorce and Bankruptcy

Jennifer M. Salisbury, Secretary/ Treasurer Bankruptcy &

Creditors’ Rights Section

Unfortunately,

divorce and debt frequently come hand in hand. Financial

difficulties can strain the binds of marriage, and divorce

can often lead to bankruptcy as the income or incomes that

supported one household are now needed to support two.

Accordingly, parties contemplating divorce need to understand

how a bankruptcy fling can affect the parties’ debts

and obligations both during and after a divorce.

One of

the principal purposes of the Bankruptcy Code is to grant

insolvent debtors a “fresh start” through a

discharge of their debts.¹ However, the Bankruptcy Code

recognizes that certain interests outweigh the fresh start

for the debtor. Throughout the Code, special protections

exist with respect to “domestic support

obligations,”² which reflect the congressio- Another

way in which divnal preference for the rights of spouses and

themselves from a post-dichildren to alimony, is to file

joint bankruptcy maintenance or support over the rights of

divorce. debtors to a fresh start free of

debts.³

For

example, what happens if one spouse files a bankruptcy

petition in the middle of a divorce proceeding? Generally,

the automatic stay operates to “stay” all

litigation involving claims against the debtor spouse.

However, the Bankruptcy Code explicitly provides that the

bankruptcy fling “does not operate as a stay… of

the commencement or continuation of a civil action or

proceeding… for the dissolution of marriage, except to

the extent that such a proceeding seeks to determine the

division of property… .”⁴ The fling of a

bankruptcy petition also does not affect other aspects of the

divorce proceeding such as determination of custody, alimony,

child support, visitation, paternity, and matters related to

domestic violence.⁵ And most importantly, the fling of a

bankruptcy petition does not stop most actions to collect

child and spousal support. Specifically permitted are the

withholding or garnishment of a debtor’s paycheck or

bank account to collect domestic support

obligations.⁶

In

other words, the divorce can go forward (the marriage can be

dissolved), but the divorce court cannot make the

determination as to the division of marital property, which

includes both assets and debts, unless the bankruptcy court

lifts the stay and grants permission to the divorce court to

do so. Often times, a bankruptcy court will lift the

automatic stay to permit the divorce court to divide debts

and assets, but the parties must then return to bankruptcy

court for enforcement of those rights pursuant to the

Bankruptcy Code. The fling of a bankruptcy petition in the

midst of a divorce proceeding inevitably leads to delays and

additional costs in both proceedings.

Next,

what happens if an ex-spouse files for bankruptcy after a

divorce is granted? Can the spouse shed its obligations to

the spouse that arise under the divorce decree? The short

answer is: it depends. It depends upon the nature of the debt

and upon the type of bankruptcy petition filed by the

bankrupt ex-spouse.

First,

“domestic support obligations” petitions before

filing for are not dischargeable in bankruptcy.^[7] Thus,

regardless of whether a debtor files a chapter 7, 13 or 11

bankruptcy petition, the debtor’s obligations under a

divorce decree to make payments for spousal or child support

remain unaffected by the debtor’s bankruptcy petition.

So,

what happens to debts assumed by one spouse under a divorce

decree that are not “domestic support

obligations?” Parties to a divorce decree often assume

that the assignment of debt to one party releases the other

from any liability on the debt. However, a divorce decree is

binding only upon the parties to the divorce. When one spouse

assumes a debt in a divorce decree, he or she promises to pay

that debt and indemnify (protect) the other spouse from any

collection activities by the creditor. The spouse that

didn’t assume the debt is still legally responsible for

the debt, but so long as the debt is being paid by the

ex-spouse, the non-assuming party is protected.

The

problems start when the...