How Does Bankruptcy Affect A Completed Divorce?

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For the most part, a bankruptcy does not affect a completed divorce. For example, domestic support obligations are not affected by a bankruptcy filing. However, there is one very important possible exception.

1. Lopsided Asset Division, Fraudulent Transfer Avoidance, Denial Of Chapter 7 Discharge

   Suppose the division of assets was lopsided, where one ex-spouse received a much larger portion of the community property than the other. If the ex-spouse who received the smaller portion later files a Chapter 7 bankruptcy petition, then the Chapter 7 Trustee may seek to characterize the asset division as a fraudulent transfer to be avoided for the benefit of creditors.

   Fraudulent transfer is when a person transfers assets to another person, either (a) to hinder, delay, or defraud creditors, or (b) without receiving a reasonably equivalent value in exchange for the transfer. A lopsided asset division falls under the second definition. The Chapter 7 Trustee can avoid (i.e., undo) the fraudulent transfer and seize the assets for the benefit of the creditors. The typical look-back period for fraudulent transfer avoidance is four years.

   However, there is another sharp edge: If the debtor engaged in the fraudulent transfer during the one-year period prior to filing a Chapter 7 petition, the debtor is ineligible for a discharge.

2. How Might Child Support And Alimony Be Affected After A Bankruptcy Filing In California?

   Child support and alimony are not affected after a bankruptcy filing in California. Bankruptcy does not stay is the collection of child support and alimony. (The combination of child support and alimony is called domestic support.) In fact, in Chapter 11 and Chapter 13 the debtor must remain current on post petition domestic support obligations, and cure all prepetition domestic support arrearages through the plan.

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