TUCSON BANKRUPTCY ATTORNEY

Divorce & Bankruptcy

Debt relief in the context of a divorce involves dissolving community property ties and terminating contractual liabilities. In most cases, it is better to file bankruptcy prior to a divorce or at least prior to entering into a property settlement. By filing bankruptcy first, the case can be filed jointly. This will avoid duplicating attorney fees.

The bankruptcy will also simplify the divorce, by eliminating the need to assign debts. In bankruptcy, assigned debts become non-dischargeable "domestic support obligations" with respect to the divorcing spouses (See ? 523(a)(5) & (15)). This is very important because creditors are not bound by the terms of the divorce and ex-spouses can seek future reimbursement.

There are some instances where a bankruptcy should not be filed until the divorce has been finalized, which is discussed below (See "When to File Divorce Before Bankruptcy). The decision to file bankruptcy before or after a divorce pivots on community property concerns and qualification issues.

Community Property

Arizona is a community property state. This means assets and debts that are incurred during marriage are presumed to be property of the marital community, with the limited exception of property acquired as a gift or through an inheritance (See A.R.S ? 25-211). In addition, each spouse has the legal authority to incur debt and otherwise bind the marital community (See A.R.S. ? 25-214). Community property liability is in addition to the contractual liability of the signing spouse(s). Divorce severs the community estate.

Upon divorce, the court has the authority to allocate community assets and debts among spouses via a property settlement (Cadwell v. Cadwell, 126 Ariz. 460 (1980) & A.R.S. ? 25-318). In dividing community property, the court has broad discretion to consider reckless conduct by a spouse, including excessive spending, destruction or concealment of property, or fraudulent disposition of marital property (See A.R.S ? 25-318). The Court may also create a lien upon the separate property of either spouse to secure payment for any interest or equity in property, for child support or spousal maintenance, and other causes (A.R.S. ? 25-318). With this authority, the court issues a final property settlement that will be binding on each spouse. This settlement does not bind creditors.

A divorce does not eliminate community, but rather transitions the debt into joint debts. Both spouses can be sued on the community debt after the divorce. Therefore, the divorce decree and allocation of debts therein, operates to determine future rights and obligations relative to each spouse (Lee v. Lee 133 Ariz. 118 (App. 1982)). These obligations to each other in the context of the divorce decree can become "domestic support obligations" within the meaning of the bankruptcy code (See 11? USC 101 (14 A). As such, a divorced spouse can sue an ex-spouse for reimbursement for payment of a debt that was assigned to the other spouse (Fisher v. Sommer, 160 Ariz. 530 (Ariz.App. 1997). Typically, this takes the form of a cross-complaint in the suit regarding the debt.)).

If both spouses file bankruptcy prior to the property settlement, there will be no future domestic support obligation issues on assigned debt. Ideally, bankruptcy makes simplifies the property settlement aspect of the divorce. Filing a joint bankruptcy also has the added benefit of the husband and wife working together to ensure the accuracy and thoroughness of the petition.

When to File Divorce Before Bankruptcy

In some situations it is better to hold off on bankruptcy until after the divorce has been completed. In the event that both spouses do not qualify for a chapter 7 bankruptcy, it is better to file a chapter 13 bankruptcy after the divorce has been completed. By waiting, a debtor will have better clarity on their expenses, including any child support or alimony obligations.

A second reason to postpone bankruptcy is to use the property settlement phase of the divorce to assign non-exempt assets to a spouse that does not want to file bankruptcy, or will be filing a chapter 13 bankruptcy. An alternative would be to have the family court enter a temporary order allocating assets, which could also protect non-exempt assets. This will allow the other spouse to file a chapter 7 bankruptcy without losing the non-exempt assets. If the divorce petition has been filed, a bankruptcy can still be filed, which will "stay" the family court proceeding, at least to the extent of property settlement. This is because, upon commencement of a Chapter 7 bankruptcy, the community property becomes part of the bankruptcy estate.

Another consideration to filing bankruptcy first, is that an Arizona family court judge can balance a debtor's discharge of community debts against assets of the non-filing spouse, i.e. providing a non-filing spouse a greater portion of assets to offset their sole and separate liability to otherwise discharged debts. However, this risk is perhaps secondary to risk of creating non-dischargeability issues

As a word of caution, the trustee will review a divorce decree and non-exempt assets cannot be disproportionally assigned to one spouse. If the property settlement and/or divorce appears to circumvent the bankruptcy code, the bankruptcy trustee can void transfers and take other such action as necessary. To avoid any issues, a debtor's bankruptcy attorney should be working with a debtor's divorce lawyer.