COVID-19 has adversely affected the economy, creating job loss, pay cuts and reduced hours for millions. As such, bankruptcies are projected to spike within the next year.
Before choosing to file for bankruptcy, consider the relative benefits and costs. For those facing family law issues, there are further factors complicating the decision to file. Listed below are a few considerations to be aware of if you are contemplating bankruptcy, as well as information particular to divorce proceedings.
Should I File For Bankruptcy?
First, consider the anticipated duration of your unemployment status or income reduction. You should account for any unemployment benefits and other sources of support, as well as your ability to defer payment obligations. Don’t forget about benefits related to the Coronavirus Aid, Relief, and Economic Security Act (CARES). If you believe your circumstances will improve once the economy recovers or anticipate having sufficient funds to make up for any missed payments, it is wise to reevaluate the efficacy of bankruptcy at a later date. Additionally, due to the unusual circumstances as a result of COVID, many landlords and other creditors have been flexible and willing to settle or otherwise compromise on unpaid debts.
Even with debt relief available in some situations, it is critical that you pay your essential bills first, such as utilities, car payments, and mortgage/rent payments. Deferring credit card payments and other non-essential creditors for a limited amount of time will not be overly prejudicial to your credit or your financial standing. However, if your situation continues to worsen, and you do not have any foreseeable means out of your debts, filing for bankruptcy may be a viable solution.
Individuals have the choice to file either under Chapter 7 or Chapter 13 of Title 11 of the U.S. Code.
Chapter 7 is a liquidation bankruptcy, which means that the bankruptcy trustee will sell all the non-exempt assets of the debtor and distribute the proceeds to the creditors. Exemptions vary by state and in most cases, there are no unprotected assets to distribute. You must meet certain qualifications to be able to file under Chapter 7, such as gross income below the median. At the end of the process, dischargeable debts are wiped out. Some debts like domestic support arrearages, tax obligations, and most student loan balances are not discharged at the end of the bankruptcy process.
In a Chapter 13 bankruptcy, debtors will repay debts over a period of three to five years. In this case, you propose a plan to repay your debts through monthly payments. The main incentives to file under Chapter 13 are to prevent the loss of assets such as a home, car, or other items that you want to keep. Once you file for bankruptcy, the court allows for the entry of an “automatic stay” which stops any creditor from pursuing you while your bankruptcy is pending, providing immediate relief.
Overlap with Family Law
If you find yourself in the midst of divorce proceedings and great financial difficulties, there are a few matters to consider before introducing a possible bankruptcy into the divorce case.
The first is that the bankruptcy automatic stay applies to pending litigation and can stop the divorce case from proceeding. The court generally prefers that parties do not continue with a distribution of marital assets and liabilities until it has resolved the bankruptcy case. There are some aspects of divorce cases that a Probate and Family Court can still address including: establishing paternity, imposing or modifying spousal or child support, hearing cases concerning child custody or visitation, or holding hearings related to domestic violence.
You should also note that a “domestic support obligation,” meaning an order for the payment of child or spousal support arising out of a divorce, cannot be discharged after bankruptcy proceedings. Even with discharge, you or your ex-spouse will be required to make up any overdue payments. If you can no longer meet a support obligation, you can request a modification through the appropriate Probate and Family Court. The parties can try to agree on a temporary adjustment, or the payor may seek a temporary modification from the court.
There are also strategies around when to file for bankruptcy or whether to file jointly. It may be best to clear up bankruptcy issues before filing for divorce as mentioned above, courts may halt divorce cases until the bankruptcy is resolved. There are also certain advantages for married couples in a bankruptcy proceeding. Marital status protects the parties’ home from creditors as creditors of only one spouse cannot attach interests or property held in a tenancy by the entirety. Additionally, a joint bankruptcy filing could eliminate most unsecured debt for both parties. This may simplify the divorce case because the parties then do not have to divide their debt during family law proceedings.
During these unprecedented and uncertain times, it is important to be aware of your options and consider your family’s unique circumstances before filing for divorce and/or bankruptcy. You should be aware of the potential ramifications if you or a former spouse file for bankruptcy during divorce proceedings. Remember that filing for bankruptcy does not discharge all debts and may only provide temporary relief. Having divorce proceedings during a bankruptcy is a complex process and requires professional advice from an attorney. However, if you do find yourself taking on both cases, both bankruptcy and divorce can be very positive and provide a fresh start.
Shannon Mukerji graduated from Dartmouth College with a bachelor of arts degree in economics and psychology and is a second year law student at the University of Notre Dame. She is currently working as a summer associate at Michael I. Flores PC in Orleans.