Bankruptcy proceedings are one of the most significant areas of law that crosses over to family law. When someone files a bankruptcy petition, they essentially pause all movement regarding their financial obligations, including orders involving the division of property at divorce and family support obligations. Because much of the issues in family law cases involve payment obligations between spouses, former spouses, or other relatives, bankruptcy issues are particularly relevant to family law agreements and orders.
Discharging Obligations Under a Property Division Settlement
Generally, filing a petition for bankruptcy allows someone with insufficient income to be released from their obligation to pay off certain debts. A person who owes money under a divorce settlement or court order for the division of marital property may discharge the debt in certain situations. Discharge is available if they can only satisfy the debt by selling the house they live in or using some other “income or income producing property that is reasonably necessary for his or her support or for the support of dependents.” Bankruptcy also discharges obligations under a property division settlement if payment would result in a significant hardship and that discharge would result in an overall benefit to the petitioner.
No Automatic Stay for Alimony and Child Support
Bankruptcy typically precludes creditors from initiating collection or enforcement actions against the petitioner. This is known as an “automatic stay” and courts will not advance legal actions for the repayment of money filed by the petitioner’s creditors during the automatic stay period. However, the automatic stay does not freeze the petitioner’s obligations to pay alimony and child support. This is because the livelihood of the petitioner’s child and former spouse depend on such payments.
Alimony and Child Support Are Not Preferential Transfers
Bankruptcy courts generally frown upon a petitioner who pays off certain creditors near or around the same time they file for bankruptcy. This is known as a “preferential transfer” under the bankruptcy code. Preferential transfers favor some creditors while prejudicing other creditors since there is a substantial likelihood that their debts will not be satisfied. A bankruptcy trustee could undo transactions deemed to be preferential transfers.
Previously, alimony and child support payments made within one year from the filing date of a bankruptcy petition could be seen as a prohibited preferential transfer. However, recent changes to the bankruptcy code prevent the bankruptcy trustee from recovering alimony and child support payments as relief for a preferential transfer.
Consult the Law Office of Russell S. Hershkowitz, LLC
At the Law Office of Russell S. Hershkowitz, LLC, we have over 25 years of legal experience with matters relevant to both bankruptcy and family law cases. Under the guidance and leadership of Attorney Russell Hershkowitz, our legal team can deliver personalized legal representation that is custom-tailored to your unique needs.
For an initial consultation about your case, call us at (407) 753-4111 or complete our online request form today.