It isn't uncommon to file bankruptcy during a divorce. But a bankruptcy filing can slow down the divorce process because it must be settled before the divorce is finalized. If a couple has few assets and a large amount of debt, bankruptcy helps make dividing assets a little easier. A bankruptcy case filed during a divorce may be dismissed, provided there are valid reasons. When a bankruptcy case is dismissed, the case is closed. Automatic stays are lifted and creditors can proceed with collecting the debt.
Bankruptcy During a Divorce
A married couple can file bankruptcy jointly or separately. A divorcing couple can file a joint bankruptcy case to eliminate marital debt. Getting rid of the debt prior to a divorce makes it easier to divide assets and liabilities. Bankruptcy wipes out your liability. Chapter 7 bankruptcy allows you to wipe the slate clean. If you have secured debt you want to keep, such as a home, you can file for chapter 13 bankruptcy protection to restructure debt. In chapter 13, you are required to make payments on your debt to the trustee. The terms of the debt are usually better, such as a lower interest rate. Both forms of bankruptcy have a severe impact on your credit score. Even if a bankruptcy case is dismissed, it appears on your credit report as soon as you file.
Dismissing a Bankruptcy Case
Filing bankruptcy is a process that is initiated by submitting a petition to file with the federal court. To file, the court must grant you permission. The court tries to keep dismissal rates low, but not all cases are approved. A bankruptcy dismissal can result from something as simple as missing documents or a more serious problems, such as not claiming all your assets or debts. Chapter 13 bankruptcy dismissal can result from failing to make your payments to the trustee. You can also file to voluntarily dismiss your bankruptcy case. Common reasons to dismiss a case include a change in your finances and reaching an agreement with your creditors. The court has the authority to deny your request for dismissal when you file for chapter 7 bankruptcy. Dismissing a bankruptcy case also carries serious consequences. When you voluntarily dismiss your case, it might affect your rights to an automatic stay if you need to file in the future.
The Impact of Divorce on a Bankruptcy Case
Divorce is not necessarily grounds for a case dismissal. However, changes can occur during a divorce. A divorce may affect your financial obligation to pay a certain debt. For example, if you reach an agreement with your spouse regarding the division of debt prior to your bankruptcy hearing, you may find the need to request the judge dismiss your case. In a contested divorce, the judge determines how assets and debts are distributed when parties cannot agree. The state divorce court cannot make any decisions regarding your property when a bankruptcy case is filed.
How Alimony and Child Support Are Affected
During a divorce, the court can make rulings on child support and alimony, even while a bankruptcy case is pending. If you are awarded alimony or child support, the extra income might affect your ability to qualify based on the means test. If you do not fall below a certain income, you may be required to file chapter 13 instead of chapter 7 bankruptcy. If you do not want to file chapter 13 bankruptcy, you can request a case dismissal. Although an automatic stay requires creditors to cease all collection activity, child support and alimony is still enforceable. Child support or alimony debt cannot be discharged in either type of bankruptcy.