BANKRUPTCY LAW IN UTAH: EFFECT ON DIVORCE

by Troy R Jensen on Sep. 08, 2017

Bankruptcy & Debt Bankruptcy Divorce & Family Law  Divorce 

Summary: Are you wondering if you should obtain your divorce prior to filing bankruptcy or vice-versa? This article discusses the pros and cons of both approaches. You are advised to consult with an attorney to review your own specific facts and circumstances!

BANKRUPTCY LAW IN UTAH: EFFECT ON DIVORCE

OVERVIEW:

             Divorce is a common catalyst for the need to file for bankruptcy.  It is always important to speak with your attorney to determine the optimal time for filing.  This is even more important when a divorce is pending or imminent because of the effect one case will have on the other!

SEPARATE ACTIONS:

If you were previously divorced or are currently involved in a divorce you need to be aware that the divorce proceeding in State District Court and the declaration of bankruptcy in Federal Bankruptcy Court are two separate and distinct forums with different rules.  The judge in your divorce action grants a dissolution of your marriage – in other words, an order legally ending the marriage relationship.  In addition, the judge grants ancillary orders regarding child custody, parent time and support.  Those provisions are typically unaffected by a bankruptcy filing.  In most cases, there will also be orders dividing marital assets and joint obligations.  Be advised, your creditors are not a party to the divorce action and can enforce contracts signed by both parties regardless of what is ordered in the divorce.

For example, your divorce may order your ex-spouse is solely responsible to assume and pay the mortgage payment, a car payment or a credit card bill.  In the event, your ex refuses to comply with the divorce decree and either refuses to pay the assigned debt or files bankruptcy on that debt, the lender will still be able to pursue you for joint obligations if you signed on the dotted line!  Of course, you would likely have a remedy in the divorce action, usually for contempt or enforcement. Nevertheless, your right to remedy the situation in Family Court will not deter your creditor from enforcing the underlying debt contract against you. 

Bottom line:  Although you and your ex are bound by the terms of the divorce decree, your creditors are not.  It does make sense when you consider they are parties to the contract but were not involved (at least not directly) in your decision to divorce. 

AUTOMATIC STAY:

             When a Debtor files for bankruptcy, two things automatically happen: First, most of his or her assets automatically become property of your bankruptcy estate and a trustee is appointed to oversee and administer the estate as outlined below.  Secondly, the Court issues an order, called the Automatic Stay which immediately “stays” or halts any further efforts to enforce or collect a debt from the debtor or debtors who filed.  The stay will not affect your entire divorce proceeding, but will affect the division of property in the estate.  Filing a voluntary petition for bankruptcy during divorce proceedings may potentially delay or complicate the divorce.   

            CHAPTER 7 ADMINISTRATION:    The trustee in a Chapter 7 filing is charged with the authority to sell your non-exempt assets to pay unsecured creditors.  If you file for bankruptcy during your divorce, the trustee must determine which, if any, of your assets are property of the estate and whether qualified assets should be liquidated for the benefit of creditors.  If property is jointly owned with an ex-spouse, the Trustee may be authorized to sell non-exempt property in its entirety.  If it is determined your ex-spouses interest in that asset is NOT part of the bankruptcy estate, then the trustee will pay your ex the value of his or her interest from sale proceeds. 

            CHAPTER 13 ADMINISTRATION: The Chapter 13 trustee in contrast, will not sell property to pay creditors however, the value of non-exempt property in the bankruptcy estate affects the amount of your plan payment that must be dispersed to unsecured creditors (the amount that would be subject to liquidation in a Chapter 7 filing must be paid into the plan).  A chapter 13 plan last for at least three years but no more than five years.  Bottom line:  The Chapter 13 Trustee will still need to calculate the value of property interests if a Chapter 13 is filed during the divorce.

ADVANTAGES OF JOINT BANKRUPTCY FILING (pre-divorce):

            BANKRUPTCY AND DIVORCE:  Generally speaking,          bankruptcy proceedings take precedence over a divorce action.  Your divorce case, at least as it relates to debts and division of property, will be delayed until the bankruptcy is finalized.  It is not practical to accomplish both at the same time.  With that said, there are often advantages for couples to file bankruptcy first.

            INCOME/MEANS TEST:  If one spouse is the sole or primary income earner, filing for bankruptcy jointly will increase the chance of qualifying for a Chapter 7 for the higher earning spouse.  If filing a chapter 13, you increase the change of qualifying for a three year plan (rather than five) and may be required to pay less money to unsecured creditors.  Be advised: When filing a chapter 13 plan, both spouses are responsible for the plan payment. 

      COSTS AND FEESAlthough divorce is difficult and those involved are often emotional and may disagree over many issues, those couples who are mature enough to set emotions aside in order to discharge marital debt jointly prior to filing divorce usually end up saving money in fees and costs as well as making the process less psychologically and emotionally grueling.  In addition, it is economical to file jointly because you will typically only pay one set of attorney fees and one filing fee to the Court!  Most bankruptcy attorneys charge the same retainer for single filings as they do for joint filings. 

MARITAL DEBT: Discharging marital debt in a joint bankruptcy filing most often simplifies the property division and debt allocation proceedings in a divorce, thus making the divorce proceeding that much less time consuming and less costly as well. 

Discharge marital debt prior to bankruptcy decreases the risk of future divorce litigation regarding payment of debts.  As mentioned above, the division of debt in a divorce does not change the fact that both spouses are liable for joint marital debt.  If marital debt is discharged in bankruptcy prior to the divorce, the parties not only eliminate litigation during the divorce but also eliminate the risk of future litigation in contempt proceedings.  This avoid the unfortunate circumstance where one spouse agrees to take the lion’s share of debt in the divorce and later files for bankruptcy.  Even though the non-filing spouse is not obligated to pay the debt as per the divorce decree, the creditors are still able to pursue a claim against him or her.

EXEMPTIONS IN UTAH:  In Utah, many of the allowed exemptions are doubled for married couples.  Therefore, you are more likely to protect assets in a joint bankruptcy case then you would in separate bankruptcy filings after a divorce.  For example, Utah statute allows joint debtors who are married a homestead exemption of $60,000 for the primary residence.  In contract, an unmarried debtor can only exempt $30,000 for their home.  Exemptions for married debtors are also doubled for most household goods and furnishing, family heirlooms, animals, books and musical instruments.

ADVANTAGES OF FILING DIVORCE BEFORE BANKRUPTCY:

            INCOME/MEANS TEST:  It may be advantageous to delay your bankruptcy filing until after the divorce if your joint income prohibits you from declaring Chapter 7.  This may allow either or both spouses to discharge joint marital debt in a 90 day window thus avoiding a payment plan between three to five years. 

ASSET AND FINANCIAL PLANNING:  A well-drafted divorce settlement may protect assets from liquidation in a subsequent bankruptcy filing.  In many cases, one spouse takes the marital home and the other spouse is removed from title and mortgage.  This method should be employed to protect the other spouse from the mortgage creditor.  In addition, if domestic support obligations are worked out in the divorce prior to the payor spouse filing for bankruptcy, the bankruptcy budget will be more certain.  This is important in chapter 13 cases where the Debtor’s disposable income is an important factor. 

LEGAL ADVICE

  Despite the fact that bankruptcy and Divorce are separate proceedings with separate enforcement mechanisms, the two areas do overlap.  Speak with your bankruptcy attorney to determine how one will affect the other as well as whether to file the divorce first and the bankruptcy later or vice versa.  Failure to seek out this advice could result in unwanted (and potentially expensive) delays in your divorce  and or bankruptcy cases.

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 Do you have questions about Divorce and Bankruptcy Issues and how one affects the other? Call attorney Troy R. Jensen – 801-612-2112 – JENSEN LEGAL

KNOW THE LAW, KNOW YOUR RIGHTS, KNOW I WILL FIGHT FOR YOU!

 

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