When Bankruptcy Meets Divorce

Just over two years ago, President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, which became effective Oct. 17, 2005. If you are getting divorced, this new bankruptcy law could concern you. Reason: While you may not realize it, in this country, our high divorce rate and bankruptcy commonly intersect.

Here’s how. Until the enactment of the BAPCPA, the bankruptcy process was seen by some, and used by many, as a tool to permanently evade (or, to use bankruptcy terminology, “discharge”) family obligations foisted upon them by agreement or court order after a marital dissolution. Plus, once a person filed a bankruptcy petition–for liquidation under Chapter 7 or reorganization under Chapter 13 (or, less commonly, Chapter 11)–he gained the protection of an “automatic stay,” preventing creditors from taking any actions against him, his income or his property to collect their debts.

If the “debtor’s” income was less than the sum needed to maintain his lifestyle, including debt service, he would generally opt for the Chapter 7 liquidation, taking advantage of whatever homestead and property exemptions his state allowed, thus protecting his assets from creditors. If any nonexempt property existed, the bankruptcy trustee would liquidate it to pay secured creditors first, with unsecured creditors, such as ex spouses (who lacked collateral or guarantees) at the back of the line.

While Chapter 7 liquidation was not a means to avoid a mortgage or shirk taxes secured by liens, it did provide the debtor a clean slate, free from pesky consumer debt–credit cards, loans from friends and family, legal or medical bills–and whatever equitable distribution payments he couldn’t comfortably afford. Plus, if a person happened to live in Florida, Iowa, Kansas Oklahoma, South Dakota or Texas, he could really make out like a bandit because these states had (and still have) limitless homestead–and generous property–exemptions.

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Overcoming the 8 Roadblocks to Settling Your Divorce

In my last post, I discussed 8 roadblocks to settling your divorce, as listed by Jeffrey Berendt, a Canadian divorce lawyer, at Ottawa Divorce Blog. They are not easy to overcome, yet they are the reason that many divorce cases become so difficult to resolve.

My preferred method for dealing with a lot of these roadblocks is to get a neutral experienced third party involved who can deal with the roadblock. In an amicable case, this can be a mediator, preferably one with great credentials. Otherwise, this person normally is a judge. Although I like to try to keep cases out of court if possible, if there is a serious roadblock to settling your case, you’ll need to go to court, so for today I’ll just assume your case is a litigated one and the neutral third party is a judge.

One feature of the family court system in Ontario, which I support strongly, is early judicial intervention in a non-adversarial setting – the case conference. Handled appropriately, the case conference can remove a lot of the obstacles I discussed and allow the parties or their lawyers to work towards a resolution of their case.

Here’s how a judge can help, particularly at a case or settlement conference:

1. The other divorce lawyer. In my last post I discussed how an inexperienced lawyer may not be reasonable simply because they don’t know what a local judge will decide. However, a judge at a case or settlement conference can give an opinion as to what the judge would decide at trial. I also discussed how an overly aggressive lawyer can be a roadblock. Family law judges really encourage reasonableness and aggressiveness often backfires in court. As well, an early victory at a motion can help in the case of an overly aggressive lawyer.

2. Unreasonable clients. Although many clients don’t listen to their lawyers, generally clients listen to judges. An early case conference can allow a judge to give an opinion as to the strengths and weaknesses of each spouse’s case. If someone hears something from both their lawyer and a judge, normally they will (begrudgingly) go along with it.

3. Child custody disputes. Getting the Children’s Lawyer or a child custody assessor involved can really help, both in terms of resolving the case, and in helping each party to see their strengths and weaknesses as a parent.

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