The Impact of Bankruptcy on Property Division in Divorce

Bankruptcy and divorce both have serious implications when it comes to your property; so, what happens when you have to undergo both at the same time? The impact of bankruptcy on property division in divorce is multi-faceted and highly complex; if you’re facing this situation, you should consider speaking to a lawyer.

You likely have a lot of questions about how you should handle your property at this time and whether you should delay either your divorce or your bankruptcy filing to improve your outcome. While we would need to examine your personal situation to offer sound advice, there are some general principles we can discuss here.

Understanding Property Division in Massachusetts Divorce

Massachusetts is an equitable distribution state. This means that courts will distribute property based on what seems fair in a divorce, rather than simply dividing everything 50/50. There is a multi-step process behind the division of marital property in divorce.

Step 1: Identify and Value Marital Property

Marital property includes all assets and debts acquired during the marriage, regardless of who holds the title. This may include:

• Homes
• Bank accounts
• Retirement accounts
• Vehicles
• Debt, such as credit card balances or loans.

Separate property, like assets owned before the marriage or acquired through inheritance or gifts, is often excluded and/or disproportionately divided in the overall division unless commingled with marital property. Another exception occurs in the case of assets that are expressly protected by a prenuptial agreement.

Once assets are identified, they must be valued, typically using appraisals, financial records, and expert opinions. The court will have the final say regarding asset valuations, but your lawyer may dispute certain findings in this area if necessary.

If you’re preparing for divorce (whether you’re in financial difficulty or not), you should develop a rough idea of how much marital property you have, and how much it’s all worth. This will give you an idea of what you might stand to lose or gain once your marriage ends.

Step 2: Consider Statutory Factors

Per Chapter 208, Section 34 of our state laws, judges consider several factors when dividing property, including:

• The length of the marriage
• The conduct of each party during the marriage.
• Each party’s age, health, and income
• Contributions to the marital estate (financial and non-financial)
• Future earning potential
• Custodial arrangements for children.

These considerations also come into play when courts are deciding whether to require one party to pay alimony and how much they should pay.

Step 3: Divide Property

It should be noted that you and your spouse can reach your own agreement regarding the division of marital property and submit this to the court for approval. Courts use the principles outlined above when spouses cannot agree on property division between themselves as well as when approving an agreement reached by the parties.

After weighing these factors, the court assigns property and debts to each party. Unlike community property states, which split everything equally, Massachusetts allows for nuanced decisions based on the specific circumstances of each case.

How Bankruptcy Impacts Property Division in Divorce

The impact of bankruptcy depends on the timing of the filing, the type of bankruptcy sought (Chapter 7 or Chapter 13), and whether one or both spouses file. Another key factor is the state of relations between you and your spouse. If you’re on good terms and you’re both willing to file for bankruptcy, it may make sense to do so while you’re still married. If one spouse chooses to file for bankruptcy alone, any debts entered into mutually may fall to the other spouse to pay.

If this is not possible and one spouse decides to file for bankruptcy prior to or during divorce proceedings, there will be a number of factors to consider.

The Automatic Stay Halts Property Division

When you submit a bankruptcy filing, an automatic stay goes into effect, legally barring creditors from pursuing collection efforts against you. This protection also applies to property division during divorce. So, when an automatic stay is in place, divorce cannot proceed as normal.

The type of bankruptcy involved is of crucial relevance here. In Chapter 7 filings, the automatic stay generally remains in place only long enough for asset liquidation to take place and debts to be discharged; this usually takes four to six months. Chapter 13, on the other hand, involves a three- to five-year repayment plan, and the automatic stay remains in place for the duration of this period. So, Chapter 13 can cause a very significant delay in the entry of a divorce.

The Bankruptcy Estate Affects What’s Divisible in Divorce

When a spouse files for Chapter 7 bankruptcy, their assets become part of the bankruptcy estate. This means the bankruptcy trustee gains control over those assets to pay creditors. Property that would typically be divided in a divorce will no longer be available if it’s liquidated in bankruptcy.

This issue does not generally come up in Chapter 13 cases, as debts are addressed through monthly payments rather than asset liquidation.

It’s important to note that child support and alimony obligations are not eligible for discharge in bankruptcy. So, these payments should continue as normal regardless of any bankruptcy filing by the party obliged to pay them.

Discharge of Debts Alters Asset Distribution

A successful bankruptcy filing typically results in the discharge of a wide range of unsecured debts, including medical bills and credit card debt. However, this discharge does not apply to both spouses in a marriage if they don’t file for bankruptcy jointly. So, creditors may be free to pursue the other spouse for payment of these debts once they are discharged in bankruptcy.

How a Lawyer Can Help You Navigate Divorce and Bankruptcy

As you can now see, handling divorce and bankruptcy simultaneously is like walking into a legal minefield. If you make the wrong move, the results for your financial future can be disastrous. A capable lawyer will help you to avoid all the common pitfalls people in your situation face, such as by:

• Providing expert guidance: No matter how complex your situation is, your lawyer will have dealt with something similar before. They’ll be able to tell you what your best course of action is.
• Safeguarding your interests in property division: Divorce litigation can get adversarial, especially if there’s a lot of valuable property involved. Your lawyer will advocate for you during negotiations around property division.
• Address debt-related complications: Your attorney will help you determine how your marital debt will be allocated in light of any potential bankruptcy filings. It’s crucial to negotiate solutions for joint debt that minimize your financial exposure.
• Manage timing strategically: Your lawyer will help you to decide whether to file for bankruptcy before or after your divorce.
• Representing you in court: If the details of your divorce end up going before a judge, you’ll want a lawyer on your side who’s able to present an effective argument in the courtroom.

Emerging Stronger with Expert Legal Guidance

Unfortunately, financial difficulty and marital strain often go hand in hand. For this reason, it’s not uncommon for bankruptcy and divorce to happen alongside one another.

This is a difficult position to find yourself in, but there is always light at the end of the tunnel. With capable legal representation, you should be able to make the best of this bad situation.

Contact Lamb & Lamb today to schedule a free initial consultation about your case. You can reach us via our online contact form, or over the phone at (978) 744-8818. We’ll give you the advice you need to hear, not the advice you want to hear.