Can The Enforceability Of A Property Settlement In A Divorce Agreement Be Affected After A Bankruptcy Filing In California?

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1. Divorce Property Settlement And Bankruptcy

   There are three aspects of property settlement in a divorce that are affected by a bankruptcy filing. I have already discussed two of them, so I will simply remind you of them here. The third is new territory.

   1. The Division Of Assets And The Automatic Stay

   If during the pendency of divorce proceedings one spouse files a bankruptcy, the division of assets is stayed and cannot be completed while the stay is in place. Therefore, one or both of the parties must ask the bankruptcy judge to lift the stay. Otherwise, the division of assets cannot be completed until the bankruptcy case is completed.

   2. Lopsided Division Of Assets

   If the division of assets was lopsided, then the Chapter 7 Trustee may seek to characterize the asset division as a fraudulent transfer, and avoided the transfer for the benefit of creditors.

   3. Equalization Payments And Bankruptcy Eligibility

   In some divorce property settlements, one spouse gets the house, and the other spouse receives monthly equalization payments. Those payments are income. If the debtor’s income — including the equalization payments — is too high, the debtor may be ineligible for Chapter 7 protection.

2. How Is Joint Credit Card Debt Handled If Only One Of The Responsible Parties Is Filing Bankruptcy And There Has Been A Divorce?

One of the steps in marital dissolution is the assignment of debts. For example, the divorce judge might assign each spouse a portion of the credit card debt. If one ex-spouse files for bankruptcy, and receives a discharge, that spouse no longer owes any of the credit card debt to the credit card companies. Those creditors may then demand payment from the non-filing ex-spouse.

The nonfiling ex-spouse will petition the Divorce Court to require the filing spouse to pay the nonfiling spouse so the nonfiling spouse can pay the credit card debt that had been assigned to the filing spouse. The Court will grant the requested relief. The reason: One kind of debt that is not dischargeable in a Chapter 7 is a debt to a spouse or a former spouse that is incurred as part of a separation agreement or divorce decree. However, such a debt is dischargeable in a Chapter 13 bankruptcy.

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