Divorce in Bankruptcy
One of the leading causes for divorce in the United States is family finances. Therefore, it is entirely plausible that married couples in the midst of a bankruptcy filing end up also filing for divorce. In this article, we explore the legal impact that divorce can have during a Chapter 13 bankruptcy.
Chapter 13 bankruptcies usually last three to five years, due to the length of the repayment plan a married couple sets up with the court. During these years, the couple is required to make monthly payments on the bankruptcy plan in addition to their normal expenses, such as mortgage or car payments. All these payments combined can cause marital stress, and unfortunately, the marriage can sometimes end in divorce in the middle of the Chapter 13 bankruptcy.
Conflict of Interest due to Divorce
If a marriage does end in divorce during a Chapter 13 bankruptcy, the first concept to understand is the attorney’s conflict of interest. There is a legal ethics rule that bars attorneys from representing multiple clients who have adverse interests to each other. For example, an attorney cannot represent both the plaintiff and the defendant in a regular lawsuit because the attorney cannot fight and defend a lawsuit at the same time.
When a married couple hires a bankruptcy attorney, the attorney can represent both parties because the couple’s interests in resolving their financial debts are the same. If they get a divorce, the marriage itself automatically creates conflicting interests between the former spouses. Because of this conflict, the attorney can no longer represent both debtors. The attorney has to withdraw from representing the former couple, and each debtor has to seek separate counsel.
Options for Completing the Bankruptcy after Divorce
There are several options available to each divorcee to complete the bankruptcy. The ex-couple can 1) continue making regular plan payments, 2) bifurcate the bankruptcy, 3) modify the plan payments, or 4) convert to a Chapter 7 bankruptcy.
Continue Making Regular Plan Payments
After consulting separate attorneys, if the divorce is amicable and the plan payments are affordable, both divorcees can just continue making regular plan payments. Problems can arise if the divorcees cannot work out how to divide the plan payments equally. In this case, there are other options that are explored below.
Bifurcate the Bankruptcy
If the divorcees do not want to be in the same bankruptcy case together, one option is to bifurcate the case. Bifurcating a case essentially allows the court the split the bankruptcy case into two separate cases with separate attorneys representing each divorcee in their own respective cases. This way, each divorcee is free to continue the bankruptcy in their own best interests.
Modify the Plan Payments
This option allows the divorcees to pay smaller monthly plan payments to continue with the Chapter 13 and get a discharge. Each divorcee may not have enough disposable income remaining after expenses for the separate households are deducted. Therefore, this is a good option to consider to continue with the Chapter 13 bankruptcy. Each debtor should consult their separate attorney to determine if this is possible.
Convert to Chapter 7 Bankruptcy
Chapter 7 may be an option after the divorce because each divorcee would maintain separate households. Since separate households are more expensive to maintain than a single household, their lower monthly disposable income may now qualify them for a Chapter 7 bankruptcy. However, Chapter 7 bankruptcies may not be suitable if the couple was trying to save their home or pay back nondischargeable debt. Again, it is important to remember that each debtor should consult separate attorneys. This will allow each debtor to get separate individual advice that is in their best interests.