How Bankruptcy Affects Divorce Proceedings
Divorce and bankruptcy are two complicated areas of law since it involves state law and federal law. At times, these two different areas of law intersect. Understanding how bankruptcy can impact divorce proceedings and vice versa is crucial for anyone facing these challenges.
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Divorce and bankruptcy. I couldn’t pick two more interesting subjects. But it’s important because you must understand how bankruptcy could affect the divorce and vice versa. Typically, there is confusion with this issue, but that’s because we’re dealing with two different areas of law.
We are dealing with state law and federal law, and that’s what needs to be clarified. The best way to explain this is based on a blog post regarding the Second Amendment and how bankruptcy affects that right.
Even though the Second Amendment grants you the right to bear arms in bankruptcy, those firearms have value, so they may not be protected in bankruptcy. Remember, each state is different regarding exemptions, and exemptions protect your assets.
Now, federal law says you have the right to have a firearm. There’s no state law stating otherwise. There are restrictions such as having a gun in certain areas, or you can’t own firearms if you’re a convicted felon. But a state cannot pass a law that says you can’t have firearms. It’s not allowed, and the reason is simple.
That blog post can be accessed below.
When you think of the U.S. Supreme Court, the keyword is “supreme.” Federal laws are considered the supreme law of the land. See how that ties into the U.S. Supreme Court?
That’s important because you can’t have a conflict between state and federal law. If there is, the state law is unconstitutional. Now, let’s tie these legal concepts to a divorce case.
Marital Assets and Bankruptcy
Suppose an agreement was reached in a divorce case, and the standard wording in a divorce agreement is that one spouse is solely responsible for the car. Who’s on the loan? Because that will ultimately affect bankruptcy, your credit report, and everything else. Now, let’s try to figure out why.
The car loan is based on contract law. Contract law started this whole process. If the car dealership requires your spouse on the car loan, contract law is simple: you are both liable for the car loan. The family court judge cannot undo the original contract.
This is where the confusion is because clients will refer to the marital settlement agreement and say their spouse is solely responsible for the car loan, not them.
Now, let’s tie this issue into bankruptcy, which is based on federal law. If your spouse filed for bankruptcy and you both were on the car loan, once the bankruptcy is approved, your spouse is no longer responsible for that debt, but you are.
Contract Issues in a Divorce and Bankruptcy Case
Remember, federal law, in this case, bankruptcy, trumps state law. So, this could affect your credit. That’s why I always tried to get the car or mortgage refinanced in divorce cases.
I tell clients that sometimes it’s better to take a hit financially, whether selling the car or home, but at least you don’t have to worry about this twenty years later, like with a mortgage.
If you are on the mortgage for the next twenty years and your ex-spouse pays the mortgage late consistently, that will destroy your credit score.
Now imagine your ex-spouse files for bankruptcy to get rid of mortgage debt. If a refinance were done, this issue would be avoided, but if not, while your ex-spouse is no longer responsible for that debt, you are.
Why? Again, contract law. There are two people on the car loan. One person is no longer responsible for that debt because of the bankruptcy, leaving you.
Divorce, Bankruptcy, and Being Judgment Proof
Now, let’s go back to the family law judge and the marital settlement agreement that says the other spouse is solely responsible. Here’s the catch, if not confusion.
If bankruptcy is filed, a state court judge can do nothing. Remember, federal law is the supreme law of the land.
But what if the ex-spouse doesn’t file for bankruptcy, but a creditor proceeds with a lawsuit? How does this protect you? Well, you could always return to family court.
Suppose the creditor froze your bank account and got $2,000. In family court, the judge would agree that the amount should be reimbursed based on the agreement that the other spouse was solely responsible for the car loan.
The judge will give you the court order confirming you are owed $2,000. But that’s the key part. You are owed, but that doesn’t mean you will get it.
If your ex-spouse doesn’t have the money, all you have is a piece of paper that says you are owed that amount. If things change in the future, such as additional income or assets, you can pursue collection at that point.
But without the funds, that piece of paper is not worth much. We have an old saying: “The piece of paper is worth more than what’s written on it.” At the end of the day, if you can’t collect on the debt, that person is judgment-proof. This means there’s no way to collect the debt.
You can read more about being judgment-proof in my prior blog listed below:
That’s why I always push for a refinance. If not, imagine if you apply for a car loan when your ex-spouse has been making late payments. The credit reporting bureaus allow you to have a statement posted on your credit report about why the fees are late, which most likely has minimal effect.
If you qualify for the loan, the creditor will likely require a larger deposit or a higher interest rate.
Since we can’t predict the future, a refinance should be done, and if the spouse doesn’t qualify, the sale of the car or property should be pushed for.
If you have questions on this issue, email me, and if your question is chosen, I’ll post it in the Reader’s Question Forum. This will include a
Paralegal and legal studies students that are using my bankruptcy law textbook in your courses, take advantage and use the blog to supplement the course material. If you have any questions, you can also contact me via Facebook or Twitter.
Have a good weekend. Take care, everybody.
Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. For paralegals and students buying single copies, you can do so via Amazon books. To access my YouTube channel, click this link.
Please remember that the information provided on this site does not constitute legal advice and should only be used for educational and informational purposes. Always consult one-on-one with a local attorney to discuss how the facts of your case apply to the law.
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This transcript was edited for clarity.
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