Bankruptcy and Divorce: Making a Difficult Situation Even More Difficult, or Not

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Part of the dissolution process in California is the division of community assets and community liabilities. Often the liabilities far outweigh the assets and a couple on the verge of dissolution is forced to consider bankruptcy as a very real possibility.

In some ways, it makes sense to file bankruptcy when a couple is eligible because it can make the dissolution process simpler. Obviously, if there are no liabilities to divide, then half of the divisions in the dissolution are already dealt with.

However, there are some difficult considerations to make before deciding to declare bankruptcy. The first is whether it is even possible for the couple to file bankruptcy jointly. Essentially, this will turn on the relationship of the couple. If there is animosity or anger over the dissolution then it is not likely that they will be able to file a joint petition for bankruptcy as their attorney will not only find it difficult to work with them, but a conflict of interest arises when representing both parties in a marriage. If this is the case, husband and wife will likely need to retain separate counsel and file separate petitions for bankruptcy.

If the couple is amicable and getting along reasonably well they may be able to file a joint petition for bankruptcy, but they will likely need to sign a conflict waiver acknowledging that they are aware of a potential conflict of interest in their attorney representing them both. I say they may be able to do this because of that word “potential” being used a qualifier. If at any time a true conflict of interest arises, the attorney for the couple will likely no longer be able to represent either party. If the couple opts to wait until after the judgment for dissolution is entered they will need to file separate petitions in any case.

The second consideration is whether it makes sense to file before receiving a judgment for dissolution. This will likely be dependent on whether there will be any additional liabilities incurred during the dissolution process. Again, where the couple is amicable and getting along reasonably well there may not be an issue. But if the dissolution is going to be contentious there is a distinct possibility that additional liabilities may be incurred, including attorney fees (which in certain instances can be discharged in a Chapter 13 bankruptcy).

The final consideration for purposes of this article is whether one party can have their portion of the liabilities discharged in bankruptcy after a judgment for dissolution has been entered even if the other party has opted not to file. The reason this can cause issues is that in the judgment for dissolution, the Court will have ordered that the parties have divided the liabilities in a certain way. Essentially the Court will order that husband pay these liabilities and wife pay those liabilities.

If wife then discharges her liabilities in bankruptcy, the creditors, not beholden to the order of the court, will immediately attempt to collect from any other party who may be liable for those debts, i.e. the other signor of the contract, or husband. This can lead to the wife being held in contempt of Court for violating the order of the Court by not paying the liabilities.

The long and the short of it is that bankruptcy may be an option for couples or individuals involved in the dissolution process in California. However, it cannot be done without thorough analysis by an attorney that is familiar with both areas of law. Under no circumstances should one attempt to deal with the liabilities in a dissolution without discussing the issues with a bankruptcy attorney first. As discussed above, there are times when it seems that something will ease the process of a divorce, but may cause even bigger headaches down the road.

At Doyle Golde Grossman Family Law Group, our attorneys understand the intricacies of both dissolution and bankruptcy and the issues that cross over between the two. Contact us for an in depth analysis of your dissolution and potential bankruptcy issues.

Colby Freeman is an experienced attorney specializing in family law at Doyle Golde Grossman Family Law Group, Danville, CA.

cfreeman@familylawgroup.com

Terence Daniel Doyle, Esq. is the founder of the Doyle Golde Grossman Family Law Group, Danville, CA. Our vision brings together a team of highly experienced and distinguished family law attorneys all of whom deliver specialized knowledge, strategic insight and tactical planning. Since 1985, we have dedicated ourselves to this mission. We are very proud of our attorneys and our talented support team, which includes California State Bar Certified Family Law Specialists, brilliant staff attorneys, and committed and experience Certified Paralegals and family law technical staff. We practice our profession with integrity, strength and commitment to our clients.

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