Bankruptcy & Divorce in Texas
Believe it or not, a Divorce is usually a primary predictor of a Bankruptcy filing. A significant number of Bankruptcy filings are motivated or precipitated by divorce filing, and the debt liabilities associated or arising from a previous marriage.
In Texas which is a community property state, many people who file for divorce often choose to file for bankruptcy or at least consider the possibility of filing bankruptcy to address their debt arising from their former marriage. It’s quite common for people going through divorce to be under extreme financial stress and economic difficulty. Bankruptcy can sometimes be a way to get control or regain control of your personal finances in certain divorce situations. In the State of Texas and everywhere else in the United States as far as we know, there is no law that says that two people must stay married. There are however, laws that hold people who were once married liable for certain financial responsibilities for the debts incurred while they were married or obligations that arise out of marriage dissolution such as child support, spousal maintenance or alimony. Although a divorce decree most always outlines whose responsibility it is for each debt, the effect on a person’s credit or the collection activity from a creditor after divorce can be an entirely different matter. Despite a divorce decree transferring or making certain debts the sole responsibility of a particular spouse after a divorce, it will not likely stop creditors from attempting to collect debts incurred by one or both spouses before the divorce. Debts incurred in the course of marriage will also stay on your credit report for years after the divorce even if the marital settlement agreement states another spouse is now solely responsible for payment.
If you are planning to file for divorce or are in the middle of a divorce proceeding it may be a wise choice to at least examine your options under the Bankruptcy Code. A Bankruptcy may be able to provide a fresh financial start or the ability to adjust your debts before or after a divorce. Should you or your current spouse in fact be thinking about bankruptcy & divorce, you should keep in mind that the way you or your divorce attorney word your divorce settlement agreement, will have a significant impact on how the filing for Bankruptcy affects your divorce, and vice versa. It is often a good choice to wait until your divorce is finalized before filing for Bankruptcy, as you will have a much clearer picture of you financial condition and personal debt obligations after the divorce is final.
Alternately, if either you and your soon to be ex spouse are thinking about Bankruptcy, you may want to consider jointly filing for Bankruptcy before you file for divorce. This way you will be more likely to know what financial obligations will be discharged when you actually do file for divorce. And, you may also be able to better negotiate with each other with the full knowledge of what you’ll both be facing in both remaining debt as well as available property. A joint Bankruptcy filing before divorce will probably save you at least some money, since you'll only pay for one bankruptcy filing as compared to two, and as such your divorce might be much less complicated. This scenario is only possible if both you and your soon to be ex spouse are willing to work together before filing divorce. It may not be possible to work together with your soon to be former spouse. It is understandable that not all divorces are amicable situations. Many are not open to reasonable negations and tend to become unpleasant & emotionally charged when the issues of finance and marital debts arise.
Important Points on Bankruptcy & Divorce in Texas
Texas is a Community Property State
Texas is a community property state, which generally regards community property as all property that has been acquired during the marriage, other than a gift or inheritance. This is the case even if one spouse earns all the money which acquired the property as all the property acquired is still considered to be community property. A Texas divorce court may however decree an unequal division of community property depending on the particular facts of a case.
Most property acquired during a marriage, with exception of gifts or inheritances, is owned jointly by both spouses and is divided upon their divorce, annulment of the marriage, or death. A married couple’s joint ownership of property is automatically presumed by law in the absence of specific evidence that would point to a contrary conclusion for a particular piece of property. The community property system is usually justified by the idea that joint ownership recognizes the theoretically equal contributions of both spouses to the creation, maintenance, and operation of a family unit.
Community property in Texas is usually defined as property, other than separate property, acquired by either spouse during a marriage. Whether property is considered separate or community in nature is determined at the time the property is acquired. In the context of Bankruptcy and community property, spouses or soon to be ex-spouses do not have to file Bankruptcy together. However the Bankruptcy of one spouse brings all the community property into the estate of the spouse filing for Bankruptcy. Since this is the case, Bankruptcy can have a significant impact on major assets of a non-filing like a house, a vehicle, or even a 401k. It is important to in these situations to seek the advice of both a Bankruptcy Lawyer and Family Law Attorney to understand how a Bankruptcy filing will affect you and your spouse in a divorce
The Automatic Stay & Divorce
One of the most powerful benefits of filing for Bankruptcy is the automatic stay. The automatic stay is like pressing a button that simply stops creditors dead in their tracks. At the very moment a voluntary Bankruptcy case is filed under any Chapter of Bankruptcy the automatic stay (which is an injunction against most legal actions) goes into effect and most creditors CANNOT take any further actions against you without permission of the Bankruptcy Court.
This however is limited in divorce and family law proceedings. The filing of a Bankruptcy petition does not operate as a stay for certain types of actions, and under The New Bankruptcy Law, the stay is not always as automatic as it used to be. Alimony, maintenance, and child support obligations are not subject to the provisions of The Automatic Stay. Chapters 11, 12, & 13 discharges are contingent on full payment of any and all such obligations and Chapter 7 filings do not affect such obligations either. Filing for Bankruptcy in the middle of divorce will only delay the divorce proceeding and any interim child support or spousal maintenance payments are not affected by the automatic stay.
Filing Bankruptcy in the middle of a Texas Divorce
When filing Bankruptcy in the middle of a Texas divorce there are a certain things to take into consideration as a Bankruptcy filing can delay the finalization of a divorce. Texas State Court Judges and other State Court Judges aren’t supposed to make a final ruling in a divorce case while your bankruptcy case is pending in Federal Court. Although this has happened before it is unusually rare and if you do not want to further delay a final hearing in your divorce, waiting until the final decree before filing may be a good idea. If you must file for Bankruptcy during a divorce then a Motion to Lift Stay is the usual course of action to get the divorce finalized but seek competent legal counsel to determine your particular circumstances as this may not be the case in your situation.
In the middle of a divorce a person can file for Bankruptcy under any Chapter of the Bankruptcy Code they are eligible for. And, they can complete the bankruptcy process even while owing child support, spousal maintenance, or alimony. It is when the case is completed that the person will still owe the support obligation with no discharge of these types of obligations. The Discharge in Bankruptcy does not allow for the discharge of support obligations.
Current Spouse’s Information Required
In a bankruptcy filing you will have to list your current or future ex-spouse’s information (both property and income) in your bankruptcy schedules, even though he or she may not be filing bankruptcy with you. The reason is that, under Texas community property laws, half of “their” 401k, vehicles, real property, (etc..) is owned by you, and you as a debtor, have to list all of your (community) property in the bankruptcy schedules. Filing for Bankruptcy in the middle of a divorce will probably require some contact with your spouse to prepare your schedules.
Changes in the New Bankruptcy Law affecting Divorce
There are Changes to the New Bankruptcy Law affecting Divorce which in turn affects Bankruptcy filings. The new bankruptcy law now has more protection for spouses who are receiving child support, maintenance or alimony. Additionally there are very few divorce obligations that are dischargeable if any. Any parties who might be owed child support, support maintenance, or alimony are now given a high priority under the new bankruptcy law. Also, any and all alimony and child support obligations will not be discharged under any chapter of bankruptcy. Certain types of property settlements are not dischargeable and there is an examination as to whether settlement payments can be or are dischargeable.
Non Dischargeability of Certain Obligations From Divorce
Any obligations that arise from a divorce or marital settlement that are orders of a court to pay child support, spousal support, alimony, maintenance, as well as attorney's fees from a divorce proceeding which include those to modify support are not dischargeable in a Bankruptcy. These are inclusive of any payments that go to support a former spouse and/or minor children.
If an obligation from divorce is in the nature of property settlement the dischargeability may be possible, but generally property settlement obligations are presumed to be nondischargeable. Sometimes in very rare instances a person might be able to overcome the presumption of nondischargeability and possibly have them discharged. This however, requires showing that the person owing the obligation (the “debtor” in bankruptcy) cannot pay the debt and still take care of themselves, their dependents, or their business. They must also show that discharging the debt(s) would result in a benefit to them (the “debtor”) that would outweigh the harm that would be caused to a former spouse or child by non-payment (11 U.S.C. §523(a)(15).
If you are considering Bankruptcy and Divorce, or vice versa, it is extremely important to seek legal counsel for your specific situation as every Bankruptcy case, like every Divorce case, has a different set of facts and circumstances which ultimately affect the outcome or potential outcomes of a matter.
At The Law Offices Of R.J.Atkinson,LLC we are Texas Attorneys that practice Bankruptcy Law exclusively and help people file for Bankruptcy under the Bankruptcy Code. We do not practice Divorce or Family Law, and do not give legal advice in those areas. We do however know the Bankruptcy implications of Divorce, and vice versa. If you need a Family Law Attorney we can refer you to one who practices Divorce or Family Law or f you already have an attorney handling your divorce we may be able to work with them to properly advise or assist you in exploring your options under the Bankruptcy Code. We believe that divorce, like bankruptcy, is an area of the law that you can't do well at unless that's about all you do, so we leave Divorce or Family Law to other competent professionals who do just that.
At The Law Offices of R.J.Atkinson,LLC we are a Debt Relief Agency and represent people in Bankruptcy proceedings under Chapters 7,11, & 13 in Houston, San Antonio, Austin, and Dallas. If you and your spouse are considering filing for Divorce and would like to know your options in Bankruptcy, we may be able to assist. Please contact us at 800-436-9056 for a free initial consultation regarding your financial situation or if you have questions about the Divorce and Bankruptcy in Texas. There is no cost to evaluate your situation, but don’t wait until it’s too late.