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How Bankruptcy Affects Distressed Property in Divorce or Dissolution: The Basics

September 13, 2021
divorced couple and bankruptcy

SERIES: Bankruptcy and Distressed Property in a Domestic Relations Matter
YOU ARE HERE:  Part 1- How Bankruptcy Affects Distressed Property in Divorce or Dissolution: The Basics
Part 2- What is an Automatic Stay and How Does it Affect Divorce?
Part 3- How Chapter 7 and Chapter 13 Bankruptcy Affect Debt Discharge in a Divorce or Dissolution

It’s not uncommon for bankruptcy and domestic relations matters (i.e. divorce or dissolution) to go hand-in-hand. In fact, it’s probably not news to anyone that an already challenging personal situation can be significantly tested by a stressful financial situation. Likewise, it’s not unusual for a stressful financial situation to bleed over and create a stressful personal situation. It’s an unfortunate reality of life that stress often breeds stress.

At no other time in recent memory has this been truer than the present. Indeed, it’s no secret that the COVID-19 global pandemic continues, to some extent, to surge on, bringing with it a substantial amount of financial and personal uncertainty—and potentially, upheaval—for a significant number of people.

Thus, as a practical matter, how might it look when these two separate proceedings—domestic relations matters (i.e. divorce or dissolution) and bankruptcy—collide? It is our intention to explore that exact question over a series of three (3) articles on this very topic—particularly, the interaction between bankruptcy and distressed property in a domestic relations matter.

First, however, let’s start with the basics.

Bankrupcy vs. Divorce or Dissolution

In Ohio, a domestic relations matter—whether it be a divorce or a dissolution action—is a legal proceeding which takes place in the relevant county court of the Ohio Court of Common Pleas, Domestic Relations Division. The end result of a domestic relations lawsuit is the termination of the parties’ marriage. In order to achieve that end result, the relevant state court applies Ohio law in order to divide the parties’ assets and debts, resolve other financial matters, and where applicable, issue an allocation of parental rights and responsibilities with respect to the parties’ minor children. As such, a substantial portion of any domestic relations proceeding involves resolving issues concerning the disposition between the spouses of the parties’ property (i.e. assets and debts) and income.

On the other hand, a bankruptcy action is a legal proceeding which takes place in the relevant district of the United States Bankruptcy Court, and on its surface, has nothing to do with terminating a parties’ marriage. Instead, the end result of a bankruptcy lawsuit is the discharge (i.e. elimination) of certain of the party’s (or parties’) debts. In order to reach that end result, the relevant federal court applies the U.S. Bankruptcy Code (i.e. federal law) in order to liquidate assets and/or craft a plan to repay a certain percentage of the debts at issue. Ultimately, when a bankruptcy proceeding is initiated, that action creates the “bankruptcy estate,” which, with some notable exceptions, is comprised of, in relevant part:

  1. all property in which the debtor has a legal or equitable interest when the case is initiated;
  2. certain property in which the debtor and his or her spouse has in community property when the case is initiated; and
  3. certain property that would have been the property of the bankruptcy estate when the case is initiated, if it had been an interest of the debtor at that time, but was, in fact, acquired by the debtor (or the debtor was entitled to acquire the same) by certain means (including by way of a property settlement agreement with a spouse, or by way of an interim order or final divorce decree) within 180 days after the date when the case was initiated.

Thus, quite simply, that is where the overlap between a domestic relations proceeding and a bankruptcy proceeding lies: they both deal with property (i.e. assets and debts) and income.  

The bottom line: It’s complicated

Be that as it may, all bankruptcy proceedings are not created equal, nor do they necessarily impact domestic relations matters the same way. Specifically, when a bankruptcy proceeding and a domestic relations proceeding are both pending at the same time, there are different implications and considerations for how certain aspects of the domestic relations proceeding can and will progress in light of the “automatic stay” in the bankruptcy proceeding. Additionally, depending under which chapter of the U.S. Bankruptcy Code a bankruptcy proceeding is filed and proceeds (for example, Chapter 7 or Chapter 13), there may be different implications for a domestic relations action, both in the immediate and long-term. We will explore these differences throughout the remaining two (2) articles in this series.

At KJK Family Law, we understand just how overwhelming navigating these and similar issues can be, especially during an already stressful time. But you don’t need to go it alone. For further guidance on these and other related matters, please contact John D. Ramsey (jdr@kjk.com), Janet R. Stewart (js@kjk.com), or another member of KJK Family Law by calling 216-696-8700.

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