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Chandra E. Miller

A Northern California Family Law Firm

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Complications when bankruptcy and divorce are imminent

| Dec 18, 2015 | Property Division

Monetary disputes are some of the most common challenges in a marriage, and California couples may find that this is the deciding factor in starting divorce proceedings. However, there can be some complications if the money situation is so bad that bankruptcy seems to be the only way to handle large debts. The order in which the two matters are handled can vary based on issues such as marital assets, income and responsibility for debt.

The division of marital assets can be affected if a bankruptcy filing precedes divorce. When bankruptcy action is initiated, the assets of the parties filing become part of the bankruptcy estate. This means that those belongings can’t be distributed between the divorcing parties until the bankruptcy concludes unless a bankruptcy judge grants permission. A joint bankruptcy can’t be filed without an agreement from both parties, which could be difficult if there is already a lack of cooperation. Individual filing won’t address the debts of the non-filing party, which may be a useful argument for getting that partner to cooperate in a pre-divorce bankruptcy. On the other hand, a partner with lower debts may not be concerned about having them discharged.

If one partner has a higher income, the option of a joint bankruptcy may not be available. There are means tests used to determine Chapter 7 eligibility, and excessive means might prevent the discharge of debts through bankruptcy until after the divorce in such a case. Similarly, an individual with significant separate assets might want to protect them from bankruptcy action.

If financial issues are at the heart of a divorce, both bankruptcy and family lawyers may be needed to navigate the situation. In some cases, options such as mediation or collaborative divorce might be appropriate for dealing with property division and other financial concerns, but it is important to make sure that any agreements made are legally binding.