Does My Spouse Filing for Bankruptcy Affect Our North Carolina Divorce?

It is no secret that financial problems are often a significant factor in a married couple’s decision to seek a divorce. Indeed, things may be in such dire straits that one or both spouses decide to file for bankruptcy at the same time that their divorce is pending. So how exactly can a bankruptcy affect divorce?

The first thing to understand is that while divorce is a state matter–i.e, it is governed by the courts of North Carolina–bankruptcy is always under the jurisdiction of the federal courts. This can create some tension between the two proceedings, especially if one spouse files for bankruptcy after the other spouse has filed for divorce.

The Automatic Stay and Divorce

When someone files for bankruptcy protection, this creates an “automatic stay” on most pending legal actions against the bankrupt debtor regarding their debts or assets.. Basically, the stay is designed to give the federal Bankruptcy Court time to consider the bankruptcy petition and determine whether or not certain debts can be discharged. Generally speaking, any creditor with a claim against the debtor must suspend all collection activities–including litigation–until the Bankruptcy Court says otherwise.

With respect to a divorce proceeding, the stay does not delay or affect a divorce based on one year’s separation. However, a North Carolina court typically cannot address any dispute regarding the division of marital property while the automatic stay remains in effect. But the stay does not affect certain other divorce-related matters, such as determining child custody, child support or post separation/alimony obligations.

It is also important to note that “domestic support obligations” are usually not dischargeable in bankruptcy. Contrary to what you might think, bankruptcy does not magically erase someone’s debts. A bankruptcy discharge simply means that the debtor can no longer be legally obligated to pay certain debts. But the federal Bankruptcy Code prevents many kinds of debts from being discharged–including domestic support obligations like alimony and child support.

Furthermore, a parent cannot use a bankruptcy filing to get out of paying child support. The Bankruptcy Code requires a parent to continue meeting any current child support obligations enforced by a state court. In fact, in a Chapter 13 bankruptcy case, a parent must certify they are up-to-date on all domestic support obligations before receiving a discharge. Even in a Chapter 7 case, child support is considered a “priority” debt and must be paid before any other creditor.

Bankruptcy and Division of Marital Property

A former spouse’s interest in marital property can also be protected from a bankruptcy discharge obtained by the other former spouse. This issue recently came up in a North Carolina Court of Appeals decision, Brown v. Brown, involving the distribution of a military pension.

In Brown, a husband and wife were married for about 29 years. During the marriage, the husband served in the United States Marine Corps. After the husband and wife cross-sued one another for divorce in North Carolina, the husband filed for Chapter 13 bankruptcy. The wife was notified of the bankruptcy proceeding but did not enter an appearance or attempt to obtain any relief from the automatic stay.

After the now ex-husband received his Chapter 13 discharge, the ex-wife asserted a claim to a portion of the ex-husband’s military pension. The ex-husband argued that the North Carolina courts were barred from considering this claim since the ex-wife never filed a creditor claim in the bankruptcy proceeding. In effect, the ex-husband argued the Chapter 13 discharge included any legal right the ex-wife had to file a claim against his pension.

The Court of Appeals disagreed. Upholding a trial judge’s earlier ruling, the appellate court said that the ex-wife’s interest in the military pension was “proprietary as a co-owner of marital property” and not a “claim upon debt” against the ex-husband. This finding was consistent with federal and state legislation. In 1982, Congress authorized individual states to classify military retirement pay as “either marital or non-marital property” within their respective laws, and provided for direct payments of such retirement pay to a service member’s former spouse under certain conditions. North Carolina’s legislature subsequently amended the state’s equitable distribution laws to include military pensions under the definition of “marital property.”

Speak with a Monroe County, NC Family Law Attorney Today

Divorce can impose significant emotional and financial strains on a family. That is why it is essential to work with an experienced Union County family law attorney who can guide you through the process and advise you of your legal rights when it comes to making critical decisions that can affect your divorce and related legal proceedings. Contact Plyler, Long & Corigliano, LLP, today to schedule an initial consultation.