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Helping People Get A Fresh Financial Start to Regain Financial Independence

The impact of Chapter 7 bankruptcy on divorce settlements

On Behalf of | Jul 8, 2024 | Chapter 7 Bankruptcy

Divorce and bankruptcy can significantly impact each other, especially when both occur simultaneously. 

Understanding how Chapter 7 bankruptcy affects divorce proceedings in Indiana is necessary for anyone facing these challenging circumstances.

Asset division in Chapter 7 bankruptcy

In a divorce, Indiana law requires equitable distribution of marital assets. This means that the court divides assets fairly, though not always equally. When one spouse files for Chapter 7 bankruptcy, it complicates this process. The bankruptcy court may place an automatic stay on all property, preventing creditors from collecting debts. 

This stay includes the division of marital assets. The bankruptcy trustee takes control of the debtor’s non-exempt assets to pay off creditors. The remaining assets, if any, are then subject to division in the divorce. This can delay the divorce process and alter the expected distribution of assets.

Spousal maintenance and Chapter 7 bankruptcy

Alimony, or spousal maintenance, is another aspect of divorce that bankruptcy can affect. In Indiana, the court can award spousal maintenance based on various factors, including the length of the marriage and each spouse’s financial situation. However, unlike other debts, spousal maintenance cannot be discharged through Chapter 7 bankruptcy.

The spouse who owes spousal maintenance must continue to make payments despite the bankruptcy filing. If the paying spouse’s financial situation changes significantly due to bankruptcy, they can request a modification of the spousal maintenance amount. The court will then decide whether to adjust the payments based on the new circumstances.

Timing considerations

The timing of filing for bankruptcy and divorce can significantly impact the outcomes. If a spouse files for Chapter 7 bankruptcy before the divorce, it may simplify the division of debts, as the bankruptcy will discharge many of them. However, this can also reduce the assets available for division. Filing for bankruptcy after the divorce allows for a clearer picture of each spouse’s financial responsibilities post-divorce but can complicate the allocation of marital debts.

Legal advice may be necessary

Given the complexities of managing bankruptcy and divorce simultaneously, seeking legal advice is helpful. An attorney who understands both bankruptcy and family law can provide guidance tailored to individual circumstances, ensuring that the legal proceedings protect each party’s interests.

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