Often times dissolution of marriage and bankruptcy go hand in hand because one or both spouses may not be able to pay the marital debts, or one spouse seeks to use bankruptcy as a weapon to him or her an advantage after the divorce proceedings. Section 523(a)(5) of the Bankruptcy Code now makes all support obligations non-dischargeable in all chapters.
If a spouse filed for bankruptcy during the divorce, the family court still has discretion to issues relating to child support, spousal support, and attorney’s fees. However, the Court is required to “stay” the proceedings, and cannot make orders regarding marital property, division of assets, apportion of any stocks or mutual funds, or distribution of retirement funds until the Bankruptcy proceedings are over.
In general, filing for bankruptcy will not affect your spouse’s separate property, but it can affect your marital community property. The creditor can come after the portion of assets that is community or the bankrupt spouse’s separate property. It is important if you are aware that your spouse is going to file for bankruptcy that you keep your IRA and 401(k) plans separate. In many states, IRA’s are exempt and EISA plans are also protected if their documentation contains spendthrift protection. Also, in California, a life insurance’s cash value exemption is capped at a certain amount, provided you meet the requirements.
The California Bankruptcy Court recently declared obligation to pay attorney’s fees are also non-discharable debts pursuant to 11 U.S.C. Section 523(a)(5). If a spouse attempts to discharge an attorney’s fee award, it is imperative that the other spouse files an adversary proceeding with the Bankruptcy Court. This is also true if your spouse attempts to discharge community debts such as credit cards or loans. If the non-filing spouse does not file an objection, it could mean that the filing spouse is able to discharge a debt that negatively affects your credit.