Bankruptcy and Divorce: What You Need to Know (Part 2)

Divorce and bankruptcy Illinois, unfortunately, may occur at the same time. In that event, there are issues regarding what parts of the Illinois divorce can proceed while the bankruptcy is pending. The issues are different if the divorce occurs after a bankruptcy. When one former spouse goes bankrupt, questions arise as to what can be discharged and what cannot. The answer depends on what type of obligation is at issue and the type of bankruptcy.

Generally, there are two main types of obligations. The first is a domestic support obligation. These are things like maintenance, alimony, and child support. Certain payments, including payments for attorney fees, have been included in domestic support obligations even though they are not technically owed to a spouse, former spouse, or child.

The other main category of obligations are property obligations. These would include amounts the debtor was ordered to pay to the other spouse, debts assigned to the debtor by the divorce court, and indemnifications to the other spouse.

Most individuals are familiar with a Chapter 7 bankruptcy. A Chapter 7 bankruptcy limits the creditors recovery to the property owned by the debtor at the time the bankruptcy is filed. This is a “liquidation.” In a Chapter 7 bankruptcy, neither domestic support obligations nor property obligations are discharged. These obligations survive the bankruptcy. In fact, failure to comply with domestic support obligations during the bankruptcy can result in the bankruptcy petition being dismissed.

A Chapter 13 bankruptcy involves a repayment plan. As in the Chapter 7 bankruptcy, domestic support obligations cannot be discharged. However, property obligations, even those arising from a divorce, can be discharged. Also, failure to comply with domestic support obligations after filing the bankruptcy petition can result in the petition being dismissed.

Bankruptcy and divorce Illinois

These principals were recently displayed in an Alabama federal district court case. The debtor was ordered to pay over a portion of his retirement benefits each month as he received them. The debtor filed for bankruptcy and claimed the obligation was a property debt. It appeared to the court that the obligation was in the nature of property division and was subject to being discharged in the debtors Chapter 13 bankruptcy.