Introduction
Experiencing a divorce is an emotional and challenging ordeal for anyone. It entails numerous decisions and legal processes that can be overwhelming. But when bankruptcy enters the equation, matters can become even more convoluted. Louisiana residents who find themselves contemplating both bankruptcy and divorce concurrently must understand how this dual situation will affect their divorce proceedings.
Basics of Bankruptcy
Bankruptcy serves as a means for individuals and businesses to either eliminate or repay their debts while being under the protection of a federal court. Personal bankruptcy generally falls into two categories: Chapter 7 and Chapter 13.
In Chapter 7 bankruptcy, debtors must sell off assets to pay their creditors and discharge debt that cannot be repaid. The court-appointed trustee takes charge of non-exempt property, selling it to settle creditors’ claims. After the trustee distributes the funds, the remaining debts are legally forgiven.
Alternatively, Chapter 13 bankruptcy operates as a reorganization plan that allows the debtor to repay a portion or all of their debts over a period of three to five years. Debtors can retain possession of their property and settle their debt by following a court-approved payment plan.
The Intricacies of Bankruptcy in Divorce Cases
When bankruptcy and divorce are intertwined, discerning which debts should be addressed in each circumstance can be challenging. The impact of such a situation depends on the intricate details of each case, but there are several general rules to consider:
Automatic Stay
Upon filing for bankruptcy, an automatic stay comes into effect, effectively halting all creditor collection activities until the bankruptcy case reaches resolution. For individuals undergoing a divorce, this automatic stay provides respite, suspending any attempts by a spouse to collect debts.
Assets Division
Louisiana, as a community property state, classifies any property obtained during the marriage as marital property, necessitating equal division between both spouses during a divorce. However, bankruptcy law can significantly influence how property is distributed.
In cases where a debtor files for Chapter 7 bankruptcy while divorce proceedings are ongoing, the bankruptcy trustee gains control over all non-exempt property, including marital assets. Subsequently, the trustee liquidates these assets to satisfy creditors’ claims. The proceeds are then allocated among the creditors based on claim priority. After the trustee’s fees are paid, the remaining funds, if any, are disbursed to the debtor. Unfortunately, this can leave the non-debtor spouse with minimal to no assets.
Contrastingly, a debtor filing for Chapter 13 bankruptcy retains control over their property, including marital assets. They are required to repay their creditors through a repayment plan, enabling them to manage their debt and keep their assets intact.
Debt Division
Divorce also involves the division of marital debt, and bankruptcy can complicate this process, as some debts are dischargeable while others are not.
In Chapter 7 bankruptcy, all debts owed by the debtor at the time of filing are typically discharged, except for those classified as non-dischargeable. Knowing which debts cannot be discharged becomes vital to ensure the equitable allocation of marital debt for the non-debtor spouse.
Similarly, Chapter 13 bankruptcy entails making repayments to creditors over time. Any debt remaining at the end of the bankruptcy period will be discharged. If any debts are not discharged, the non-debtor spouse will need to assume sole responsibility for them.
Conclusion
Bankruptcy unavoidably adds stress to divorce proceedings. However, careful planning and seeking guidance from a qualified attorney can help manage this complex situation with minimal disruption. Understanding the intricate interplay between bankruptcy law and family law becomes essential. If you have any inquiries regarding how bankruptcy might impact your divorce, please reach out to a Louisiana family law attorney for comprehensive guidance.