You can lose your exemptions in protected property if you are behind in child or spousal support when you file bankruptcy. It is unusual for a person to be in a divorce case and not need bankruptcy relief. Once divorce was all about dividing assets, child support, and spousal support. Now it is about dividing debt. It’s now an I pay, you pay. Family law attorneys are my biggest referral source for new clients.
File Your Bankruptcy Before Divorce
A crucial issue in this analysis is timing your bankruptcy filing. From my perspective, it is better to file bankruptcy to take debt out of the equation before you ever step into divorce court. Your case then becomes a division of assets, custody and support matter.
You Control The Timing, Not Circumstances
Many domestic attorneys do not take that approach. I suspect their motivation is greed. They want all the limited fee money for themselves. Two years ago, a couple anticipating divorce came to my office to hire me for a bankruptcy. They paid in full. Shortly after that husband called to put everything on hold. His divorce attorney told him not to file the bankruptcy case yet. We were on hold for over two years. In that time, he went through two attorneys, each telling him not to file the bankruptcy until after the divorce case ended.
Recently he called the office demanding his case be filed right away because his divorce case was scheduled for imminent trial. He now had no counsel. He no longer worked at his high paying job due to medical disability. Being out of work made him fall behind in his temporary spousal support to the tune of over $13,000.
He brought his documents up to date, completed the credit counseling, and we filed his case to stay the divorce matter. At the meeting of creditors he learned the advice from his divorce attorneys was terribly wrong.
Behind In Support Payments?
Domestic support obligations (DSO) in a divorce case are not dischargeable in bankruptcy. This is not news. It has been the law for a long time. The new wrinkle involves his exempt property when there in an arrearage in a DSO. The bankruptcy code states that exemptions claimed in assets do not apply to DSO creditors. They apply to all other creditors.
For this client, all his property that is otherwise safe from creditors is not protected as to his wife in a bankruptcy proceeding. This does not mean he will lose everything so the bankruptcy trustee can liquidate his assets to catch up his back support. He could, but that isn’t always how the process works. What he will lose are the easily liquidated items. We call this the low hanging, easily picked fruit. His car which was in danger of repossession that he was surrendering anyway will be sold by the trustee and he will lose the exemption to his wife. There may be other low hanging fruit the trustee may sell as well.
One way out for this client is to think about converting the case to chapter 13. We will be meeting to contemplate this move. The support obligations are still payable, but in another chapter, he can spread those payments over 3 to five years. Whether he can afford plan payments to save his house is to be determined.
Don’t Wait If You Are Falling Behind In Support
If you are filing bankruptcy when there are divorce proceedings, you must consider the status of your support obligations. If you are current, no issue. If there is no support order yet, no problem. However, if you have support orders and you are behind, you risk having your assets sold with the equity funds being paid to you DSO creditors. DSO creditors can be your spouse, her attorney, and guardian ad litem fees on behalf of your children.