More than one warring spouse has threatened bankruptcy if the other tries to pursue their fair share of assets in a divorce. As Middlesex County divorce lawyers assisting clients on issues of asset division, child support, and alimony, we also know that whether this threat carries any weight depends heavily on the individual circumstances.
It’s fair to say that for the most part, bankruptcy is not an effective way to avoid the financial support obligations that arise in a divorce. It could delay matters, at least in the short term. It could convince a spouse or family law judge that the financial troubles the higher earner is alleging are legitimate. However, what must be made crystal clear is that family support obligations are NOT:
- Dischargeable in a Chapter 7 bankruptcy, as filed under 11 USC 523(a).
- Revisable in a Chapter 11 bankruptcy, as filed under 11 USC 1129(a)(14).
- Dischargeable under a Chapter 13 bankruptcy (and are only revisable in very limited circumstances).
In some cases, an automatic stay can delay the collection of support obligations, but it’s not going to clear them entirely.
But even if you manage to finagle a revision under an exception, bankruptcy as a divorce strategy could backfire. Because while bankruptcy does come with the promise of a fresh start, it also comes with numerous obligations and less control.
Furthermore, if the family part judge has any inkling that the filing is manipulative or deceitful, there could be sanctions in the divorce. Worse, Federal Courts could potentially dismiss the bankruptcy case or pursue criminal penalties for fraud.
Keep in mind too: Filing for bankruptcy is going to cost more in legal fees. One’s divorce lawyer is more than likely not going to be able to also handle their bankruptcy case. The divorce attorney is going to become a creditor of the bankruptcy estate - and continued representation by them is going to be subject to the bankruptcy Court’s approval.
All this said, there could be some benefits to bankruptcy for both spouses. Namely, it may eliminate their shared, unsecured marital debts to outside parties. New Jersey is an equitable distribution state. The law says the Family Court is required to allocate not only marital assets but marital debts - regardless of which spouse technically signed on the dotted line to the third party. Thus, to whatever extent such debt was solely in the debtor’s name, discharging those debts may be beneficial to both parties, and could possibly make the marital estate even more valuable.
Where legal entanglements in family law issues are a possibility in Bankruptcy Court, the Court itself may invoke a domestic relations exception to federal jurisdiction - meaning both parties will need to first figure out their finances in Family Court. The exception was underscored (with some limitations) by the U.S. Supreme Court in 1992 with its ruling in Ankenbrandt v. Richards. The Court pointed out state Courts are better suited to handle domestic relations issues than federal Courts, which don’t have a close association with the lower-level organizations that typically handle divorce, alimony, and child custody/support conflicts.
In cases where one’s purported insolvency stems from ongoing divorce litigation, higher Courts are likely to defer to the discretion of Family Court judges.
Bottom line: Bankruptcy generally isn’t a productive option if one is trying to wiggle their way out of family support obligations in state Court. Bankruptcy judges have numerous ways to disentangle their way from these disputes. However, if bankruptcy could benefit both spouses, it shouldn’t be overlooked, but it may complicate the divorce case.