When One Spouse Files for Bankruptcy During or After Divorce in Maryland

Filing for divorce is stressful and rarely ever cut-and-dried. When one or both spouses are experiencing financial hardship, an additional layer of legal issues gets stacked on top of the already growing pile of decisions that must be made.

Understanding how Maryland law applies to divorce and knowing how these rules interact with federal bankruptcy laws can help couples plan for their separation and financial futures. Whether you are in the middle of a divorce proceeding or facing bankruptcy after the divorce has been finalized, we’ll discuss what you should know about the process.

How bankruptcy affects Maryland divorce

There are different types of bankruptcies, and it’s important to know which one you’re dealing with.

Chapter 7 bankruptcy

In a Chapter 7 bankruptcy, most of a person’s personal debts can be discharged. A discharge eliminates the filing spouse’s personal liability, but creditors may still pursue the non-filing spouse for joint debts. While this isn’t always the case, it can cause extra stress on the two parties. This can change a Maryland divorce bankruptcy case by creating uncertainty about who will pay for debts such as credit cards, mortgages, or medical bills.

Chapter 13 bankruptcy

A Chapter 13 bankruptcy allows a person to reorganize their debts and pay them back over time. Filing for Chapter 13 can delay the property division portion of a divorce because the bankruptcy court must determine which assets and debts are part of the bankruptcy estate before a family court can finalize property-related issues. An automatic stay may pause division of property that is part of the bankruptcy estate.

Impact on alimony and support obligations

Even if one spouse is able to wipe out all of their personal debts post-divorce, they are still responsible for fulfilling their child support and alimony obligations.

Timing matters: Before, during, or after divorce

When a spouse decides to file for bankruptcy is important to divorce proceedings. Although it may not be possible to file for bankruptcy when it is “convenient,” if there is any flexibility on filing time, there are ways to reduce the stress it places on a divorce proceeding.

Filing before

If one spouse chooses to file before the divorce, the way property is distributed will be affected. If the property is owned as tenants by the entirety, the asset may be protected. However, the court will look closely at which debts were discharged and which assets were protected to determine a fair and equitable division of assets. Filing before a divorce may affect how exemptions apply to marital property, depending on how assets are classified and titled at the time of filing.

Filing during

A spouse who files for bankruptcy during the divorce proceedings may feel they have no other option, but they should do so with legal guidance and the understanding that this will further delay the divorce and complicate the proceedings. Filing during the divorce may require the judge to coordinate settlements with the bankruptcy trustee, especially if they are joint debts or involve joint property. The court may stay the divorce or delay property division issues that are subject to the bankruptcy pending the resolution of those matters.

Filing after

It may seem less complicated to file for bankruptcy after a divorce decree has been entered, but even if the proceedings are complete, there can still be issues that affect both spouses. If the spouse filing is responsible for alimony and child support, those obligations remain; however, joint debts that were allocated to the filing spouse could be discharged, leaving the ex-spouse potentially responsible for unanticipated payments.

Maryland-specific considerations

Maryland law has specific rules that govern bankruptcy and divorce and how they intersect.

• Joint and individual debts. Courts will consider whether the debt in question was incurred individually or is held jointly by both spouses. If the debt is joint, the non-filing spouse may be left responsible for its entirety if the other spouse has it discharged in a bankruptcy proceeding.

• Property division. Maryland allows for equitable distribution of property in divorce proceedings, meaning assets are divided fairly, though not necessarily equally. When a bankruptcy is involved, the bankruptcy trustee may consider some property non-exempt, which can affect the non-filing spouse.

• Alimony and support. Alimony and child support survive bankruptcy discharges (they are considered non-dischargeable financial obligations). As such, a divorce proceeding should structure the support clearly. It may be advisable to have court orders in place to secure payments and protect the non-filing spouse.

• Negotiating settlements. If one or both parties are aware that a bankruptcy is looming, settlement discussions can include protection for both spouses and how to structure debts and future payments.

Maryland also recognizes a form of property ownership known as tenancy by the entirety, which is available to married couples. This type of ownership can protect one spouse from creditors if the other spouse files for bankruptcy, but if the couple divorces or both spouses file for bankruptcy, this can change. Property held as tenants by the entirety is generally protected from creditors of only one spouse, but joint creditors may still reach the property. It’s best to speak to an experienced attorney about bankruptcy and divorce proceedings to protect yourself and make certain you can plan for the future.

Next steps

Bankruptcy and divorce are both complicated legal processes. When they overlap, it can cause emotional stress and fear about the future. If you find yourself in a situation where divorce and/or bankruptcy are imminent, or if you are dealing with bankruptcy after a divorce, there are a few steps you can take.

1. Speak to an attorney in both fields. Speaking to both a bankruptcy attorney and a divorce attorney can help you avoid mistakes and financial consequences.
2. Check the title to your property. Understanding property laws can protect both spouses during a divorce.
3. Plan before you file. The timing matters when filing for bankruptcy. Keeping communication open with your spouse can help you avoid stress during bankruptcy.

Although no amount of planning can make a divorce completely stress-free, these three steps can help you and your spouse plan and prepare for the future.

How McCabe Russell can help

If you are facing a divorce with the possibility of bankruptcy, the team at McCabe Russell Divorce and Child Custody Lawyers is here to help. Our experienced team of attorneys can help you understand the ramifications of a bankruptcy and how it may affect your divorce proceedings and your support after the divorce is over.

Contact our office today to learn how we can help.