USEFUL CONSIDERATIONS FOR FILING BANKRUPTCY AND DIVORCE SIMULTANEOUSLY

Many people going through bankruptcy or divorce in the Sacramento area find that these two distinct legal fields can actually run hand in hand. Often times, financial problems can lead to the breakdown of a marriage, or conversely, the breakdown of a marriage and division of assets can lead to a need for filing Chapter 7 or Chapter 13.

Ideally, if Chapter 7 or Chapter 13 rests in a couple’s best financial interests it makes sense for the couple to file a joint bankruptcy petition. This, however, requires: (1) that the parties are able to continue to work together and cooperate in the bankruptcy; and (2) they have not received a judgment of dissolution restoring them to their status as single persons.

Since many couples going through divorce proceedings cannot work together the bankruptcy process can become very complicated. A recent case filed out of New Jersey typifies the problems created when a divorcing couple decides to file bankruptcy separately but before they have actually received their judgment of dissolution of marriage.

In the case In Re: Paul Ruitenberg III, a divorcing couple decided to file for Chapter 7 independently. The debtor’s wife filed a claim against her husband’s bankruptcy alleging that the Trustee must distribute a portion of his assets to her as if she were one of his creditors. The Trustee objected to wife’s claim arguing that since the property had not yet been divided by the Court, that she was not in a position to be considered one of his creditors and receive any distribution out of the liquidation. The Bankruptcy Court agreed with wife and allowed her claim against the husband stand.

The Ruitenberg Court wrestled with determining when an interest in the equitable distribution of marital assets in a divorce proceeding becomes a claim against the bankruptcy estate of one of the spouses. The issue is a rather complex legal question. This case was filed in New Jersey, which is not a community property state like California. In California, spouses each own an undivided 50 percent interest in anything that was acquired during the marriage. This includes debts as well as assets.

One can only imagine the implications of a spouse filing for bankruptcy on debts before those debts have been divided or assigned to a particular spouse in a community property state like California. This situation would leave the non-filing spouse potentially liable for payment of the debt to the former creditor. Even if the divorce court divided the debts between the spouses equally, the spouse filing bankruptcy would eliminate his or her obligation to pay the debt and then leave the non-filing spouse responsible for the entire balance should the creditor make attempts to collect on that debt.

Bankruptcy and divorce are very complicated legal matters. Individuals must have a strategy in place when they have accumulated assets and debts and then seek to divide or discharge them. As a Sacramento Bankruptcy Attorney I am also highly experienced in filing Dissolution of Marriage and other family law cases. If you or someone you know is considering filing bankruptcy due to a pending divorce, they should contact someone competent and with experience dealing with both issues to avoid complications that may develop.