Lifetime Planning

Patricia Barrett CFP CDFA

832-858-0099

  • About Us
    • Getting Started
    • Summary of Divorce Services
    • Frequently Asked Questions About Divorce Financial Planning
    • Testimonials
  • Cooperative Mediation
    • Cooperative Divorce Mediation
    • How Texas Mediation Works
    • Divorce Mediation Articles
  • Divorce Financial Planning
    • Our Approach to Divorce Financial Planning
    • Community Property
    • Separate Property
    • Long Term Planning
    • Financial Planning Articles / Case Studies
  • Collaborative Divorce
    • Collaborative Divorce
    • How Collaborative Divorce Works
    • How We Help
    • Collaborative Divorce Articles
  • Events
  • Blog
  • Contact Us
You are here: Home / Articles / Divorce Planning / Bankruptcy and Divorce

Bankruptcy and Divorce

May 17, 2017 By Patricia Barrett

Individuals considering both bankruptcy and divorce have additional planning issues to consider. Which should be done first? Can we arrange our asset division to protect assets following divorce? Which assets can be discharged and which must be paid? Can income taxes be discharged?

There are two ways for individuals to file for bankruptcy: Chapter 7 or Chapter 13.

Chapter 7 requires liquidation of assets to pay off debts, after which remaining debts are discharged. Chapter 13 requires creation of a plan for repayment over 3 to 5 years, with eventual discharge of the remainder. However, certain debts cannot be discharged and certain assets are “exempt” from liquidation.

With either method, an “automatic stay” stops creditors from any collection efforts or court proceedings. However, if you are in the process of divorce, it also stops the divorce court from doing anything with debts. You cannot divide property if bankruptcy is in process. Usually, a decree cannot be granted either. Some people may see bankruptcy as a strategic tool to delay the divorce process.

A crucial consideration of filing bankruptcy is in determining whose name is on the debt. If the debt is all in the name of the person filing, then it may be discharged. However, if the debt is in joint names, both parties would have to file bankruptcy in order to discharge the debt. Support obligations (child support, spousal maintenance, alimony) are not affected.

For example, in Chapter 7, with credit cards in one name, the obligation is discharged. If the debts were jointly incurred, the balances would not be discharged. Any non-exempt assets, even separate property, are subject to being liquidated. The following assets are “exempt” from bankruptcy liquidation:

  • 401ks, 403bs, and other defined contribution plans
  • IRAs, including ROTHs and SIMPLE IRAs
  • Home equity
  • Life insurance cash value
  • Annuities
  • Household furnishings
  • One automobile per person
  • $30,000 for individual
  • Jewelry up to 25% of the above exemption limit

Assuming that all income taxes have been properly filed (including extensions through October of each year), past due taxes older than 3 years can be discharged. Thus, 2008 and prior years can be discharged; while 2009 through 2011 cannot. As far as going to jail for non-payment of taxes, it is NOT a criminal offense to NOT pay taxes. It IS a criminal offense to cheat on taxes.

If divorcing prior to filing for bankruptcy, can one party be awarded exempt assets along with the debt in his name, while the other party receives the non-exempt accounts like brokerage accounts and the debt in her name? According to one attorney, this “scheme” usually works; however, courts could find that they had engaged in fraud. Activities to get ready for bankruptcy may be suspect.

One must go through a qualification process to use Chapter 13, which requires a “best effort” to repay debts over 5 years. After that time period, the debts are discharged. Note that you don’t lose the assets, but are required to pay as much as possible. This is determined through a carefully created budget for basic needs and any support obligations required by law. There is a “credit meeting” and the plan is filed with the bankruptcy court to pay off debts in 3 to 5 years. If you default on payments, the creditors can once again proceed with collection efforts. Support payments are scrutinized, but still required to be paid off the top. These must be disclosed during the qualification process.

If a property settlement note is used to equalize the estates of the divorcing individuals, that note can also be discharged. Often, attorneys draft language trying to protect their client from discharge of a property settlement note by requiring that the payments become alimony in case of default. Alimony payments are not dischargeable.

Click to hear more from Patricia about home equity.

This paper is based on a continuing education presentation by Bart Balis, attorney with Balis and Barrett in Boulder, Colorado. It summarizes the key points of the talk and should not be considered legal advice.

According to Mr. Balis, coordinating divorce and bankruptcy proceedings can be a valuable way to reduce loss. Chapter 13 can be very useful in property division and may permit one to avoid paying off credit cards following divorce. But the reader should bear in mind that jointly held debts require that both parties file. And, of course, competent legal advice is vital.

Filed Under: Articles, Divorce Planning, Financial Planning

Contact Us

Call Patricia for a
Free Consultation
832-858-0099

From Our Blog

Ten facts about divorce that may surprise you

Ten facts about divorce that may surprise you

Myths about divorce abound. For one thing, divorce laws vary from state to state. So, quite often, people are confused due to what they have heard about celebrity divorces, or a friend or family … [Read More...]

Lifetime Planning, LLC

Phone: 832-858-0099

  • Email
  • Facebook
  • LinkedIn

Areas Served:

Cities

The Woodlands
Alvin
Baytown
Clear Lake
Conroe
Cypress
Dayton
Downtown Houston
Fairfax
Fort Bend
Friendswood
Galveston
Hockley
Houston Heights
Humble
Jersey Village
Katy
Kemah
Kingwood
La Marque
League City
Magnolia
Memorial
Midtown
Missouri City
Montrose
Pasadena
Pearland
River Oaks
Shenandoah
Sienna Plantation
South Houston
Spring Valley
Spring
Sugar Land
Texas City
Tomball
Victoria
West University
Also serving all Texas cities working by email, phone, and fax.

Counties:

Harris
Montgomery
Liberty
Chambers
Galveston
Brazoria
Fort Bend
Waller

Disclaimer

Information provided in this website is not meant to be construed as legal advice and does not necessarily predict decisions that will eventually be made by a court of law. It is strongly recommended that you consult competent legal advice if your divorce includes children or property issues.

Copyright © 2023 Patricia Barrett CFP CDFA · All Rights Reserved

· · ·

Log in