Bankruptcy is also just a beginning

I know, not terribly original of me, but I realized some similarities in how folks looked a bankruptcy as an end just as many look as divorce as an end. So, I wrote a post entitled “Bankruptcy: Just the beginning” on my other law blog. Hope it is helpful because divorce and bankruptcy happen together so often.

Divorce: Just the beginning

Many folks come to me regarding a divorce and perceive it as an ending. Some do not want it to happen and others believe this “end” will set them free from something painful. While it does bring a few things to a close, divorce is more appropriately viewed as a beginning. And, as a beginning, it is very important how it begins because the actions and attitudes adopted early in the process will largely determine how the process will go forward.

What begins is twofold: 1) the legal process which can take many months, and 2) the process of dealing with the fall-out of the marriage and the divorce which can take years. Very few people who divorce actually sever all ties with their ex-spouse. Even when there are no children involved, ones’ ex-spouse usually continues to play some role in one’s life even if it is not one where there is little or no direct communication. The rates of second divorces being higher than first ones tends to support this notion. Having turned to divorce ones seems to make it a more ready position to take again and I cannot help but wonder if some degree of comparison between the marriages (and spouses) goes on at some level. The more obvious roles are when there are children involved or when property disputes outlive the actual marriage.

This perspective of beginning is important for a few reasons. One reason is that I caution folks to recognize that divorce is unlikely to meet their expectations for bringing freedom or joy to their life. Just as many people have unrealistic expectations about marriage from the start (which contribute to divorces), they also often have unrealistic expectations about divorce and become frustrated when it does not turn out as they thought. So, hopefully people will give deeper consideration to taking this major step if they realize it will not bring the level of freedom and joy that they expect. I believe you will find that mental health professionals would agree that the person considering divorce will have to work out the issues of the marriage relationship either in the marriage or out of it to find that freedom and joy, so no need to rush into a divorce in most cases (I’m not talking about situations of active infidelity and imminent physical danger).

A second reason for this caution is so that they can start well and a good lawyer will help with this. By starting well, I mean they will help them deal with anger, hurt and other issues in a more appropriate forum than in the legal process. I have been amazed when a person will spend hundreds of dollars in legal fees fighting over something that is only worth hundreds of dollars to begin with. This ordinarily indicates they are not really so concerned with the stuff as they are interested in resolving emotions and power struggles. If one goes into a divorce and brings contention into it, then the next dozen or so years are likely to be contentious also. However, if on goes into it being able to release things that are truly not that important, then the next dozen years are so are more likely to have a degree of peace.

Now, I recognize that this is not always possible. Sometimes, no matter how professional and amicable one party attempts to make the divorce, they cannot control their spouse. If they could control their spouse – well. . .. This does not mean it is time to fight fire with fire. That just results in massive damage to both parties. However, it does call for taking a firm (rather than aggressive) stance, deciding what is most important, and setting those boundaries. If one takes a firm stance that is reasonable, the judge is also more likely to recognize it and agree. So, avoid seeing divorce as an end to something; rather, recognize it is a beginning and, if it must be, then prepare yourself to begin it well.

A Just Distribution of Property: Domestic support obligations

I wrote a post on the Kentucky Bankruptcy Law blog about how equitable distributions as a result of divorce are treated in a Chapter 13. You can read that post here. In short, a domestic support obligation that arises from the distribution of property will be treated as a general unsecured debt in a Chapter 13. This creates a quandary for settling matters, especially in this market where houses (the major asset that is divided up in a divorce) take so long to sell.

If there is a major asset, like a house, that has equity to be divided and one party wants to hold onto it or control its sale, one strategy is to realize that equity through debt. This can be done two ways. The simplest way and best way is the party holding onto that asset to take out a loan for the amount of equity owed and give that upfront to the other spouse. That used to be easier to do, but with dropping real estate values, obtaining a loan, even a secure one, could be difficult or impossible.

A second approach would be for there to be a promissory note from the spouse keeping control of the asset to the other party and secure that loan against the property. While this is not as good as having cash in hand, it is far better to have a secured debt going into a Chapter 13 than just an unsecured domestic support obligation that can get discharged. Since it is likely a junior lien on the property, then it could still not be paid in full, but the chances are at least better.

Domestic Support Obligations and Bankruptcy

Bankruptcy of an ex-spouse after the entry of a divorce decree (the dissolution of a marriage) can have substantial implications of obligations owed by that ex-spouse to you.  I’ve written a post regarding domestic support obligations in Chapter 7 as compared to Chapter 13 bankruptcy and I encourage your to click over and read it since I am not going to go into details here.  What I do want to reiterate here is that it is important to know how child support, alimony (maintenance) and equitable distributions of assets are treated in bankruptcy.  

In order to insure you do not end up getting paid only a percentage of what is owed to you from distribution of marital assets, be sure to get your share of assets right away rather than allowing for payment over time.  The most common example is where one party wants to keep the marital residence after the divorce is final.  They agree, then, to pay their soon to be ex-spouse a set number of dollars of the equity of the house over time in exchange for retaining the house.  Later they go into Chapter 13 bankruptcy and suddenly, you only get 10% or less of what’s owed to you and they get to keep the house. 

As hard as it may be, the more financially sound thing to do is to insist of the property being sold or refinanced and realize your share BEFORE ever quitting your interest in the property.  Also, just because something is called “child support” or “alimony” does not make it non-dischargeable.  The bankruptcy court can make its own determination based on the facts of the case as to whether it is actually an equitable distribution of property under the guise of alimony or child support, so it is risky to try and realize your share of equity by increasing child support or getting alimony.