Tuesday, March 17, 2015

ON DIVORCE AND BANKRUPTCY

From
 
Robert H. Solomon, P.C.
24 E. Park Avenue
Long Beach, New York 11561
 
 
"Dear Colleague:
            I hope this finds you well.  I recently came across this issue in my practice and thought it may interest you and your clients. Rob
            It is not uncommon to find that a person filing for divorce is also filing for protection under the Bankruptcy Code, or vice versa.  Usually financial distress leads to a divorce and/or divorce leads to financial stress on one or both spouses.  One should consider the consequences of choosing the order in which he/she files bankruptcy and divorce, as the order may change the outcome significantly.
            A married person may file bankruptcy individually or jointly with his/her spouse.  If a married person files individually, any joint debts the couple holds will be discharged as to the filing spouse only; meaning the non-filing spouse remains the only liable party on the debt.  Additionally, even if the couple is filing separately or only one spouse is filing, the income and expenses of the non-filing spouse are required so that the court, the trustee, and the creditors can evaluate the household's financial position and determine which chapter the filer(s) qualify for.[i]
            When determining whether to file bankruptcy or divorce first, a couple has to consider its goals.  If both parties anticipate financial difficulty and the need for bankruptcy and if both parties agree to cooperate with each other to provide all the required documentation, then they may consider filing bankruptcy jointly prior to filing divorce.  The benefits of filing jointly include sharing one legal fee and one filing fee and simplifying the divorce process by resolving most marital and individual debts prior to reaching a divorce settlement.
            However, where the parties are uncooperative with each other, where one party is opposed to the bankruptcy filing, where the combined income of both parties fails the Means Test, where there is a great deal of non-exempt marital assets, or where there are ancillary family court matters that would be delayed by the bankruptcy, then the couple should consider filing divorce prior to filing bankruptcy.
            If a party chooses to file bankruptcy after legal services are rendered, then any unpaid legal fees incurred prior to the filing may be dischargeable.  It would be prudent for any attorney to be prepared and prevent the discharge of their unpaid legal fees.  If the family law attorney suspects bankruptcy may be on the horizon for either married party, he/she may suggest filing bankruptcy prior to the divorce or may require a higher down payment of the retainer fee.  If neither are an option, then the attorney may consider an attorney’s lien.[ii]
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[i] Chapter 7 is the chapter of the Bankruptcy Code providing for "liquidation," (i.e., the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors).  Chapter 13 is the chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income (Chapter 13 allows a debtor to keep property and pay debts over time, usually over three to five years).
[ii] See N.Y. Jud. Law § 475."

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