Bankruptcy After Divorce — You May Not Get What You Bargained For

Be careful in your divorce to pay attention to the possible effects of a bankruptcy.  Most of the time bankruptcy does not have a significant impact on the other spouse.  However, if there was a delay in the allocation of property, the non-bankrupt spouse could lose most of what they bargained for in the divorce.

The Court of Appeals for the Seventh Circuit (this includes Illinois) just considered a bankruptcy case where the former wife was a claimant.  The divorce court awarded the husband an annuity for $200 per month.  The court also ordered the husband to pay the wife $200 per month as part of the property division.   The effect was to award the annuity to the wife, but keep the property in the husband’s name.

The divorce was in Illinois and the bankruptcy was in Illinois.  The bankruptcy trustee agreed with the ex-wife that her claim against the bankruptcy estate was worth $158,000.  This included $12,000 the bankruptcy trustee received from the annuity while the bankruptcy was pending.  The court held the wife’s claim could not include these funds as they were part of the bankruptcy estate and she was an unsecured creditor.

Luckily for the ex-wife in the case, the bankruptcy estate contained enough assets to pay the only to creditors — her and the IRS.  As a result after the bankruptcy estate paid to her what she was owed, her claim for any payment thereafter remained in effect under the ruling by the Seventh Circuit.

This is not always the case.  If a part of a claim is considered a property distribution instead of a support obligation, it can be discharged in bankruptcy.  If it is discharged, then it is not enforceable by other means, including through the divorce court.