When Can a Chapter 13 Bankruptcy Be Severed During Divorce?

 Posted on September 15, 2022 in Chapter 13 bankruptcy

Debt can be a significant issue for many couples, and in many cases, spouses may choose to pursue bankruptcy so that they can eliminate certain debts and regain financial stability. Chapter 13 bankruptcy is the preferred option in some cases, and it may allow various types of debts to be discharged while avoiding a home foreclosure or the loss of other property. This type of bankruptcy will require a couple to make ongoing payments for several years, ensuring that some of their debts will be paid off and allowing them to get caught up on missed payments, interest, and late fees. However, if a couple chooses to get a divorce prior to the completion of their Chapter 13 repayment plan, they may need to determine how this will affect their bankruptcy case. One option in these situations involves dividing a joint bankruptcy into two separate bankruptcy cases. By understanding the option to sever or bifurcate a Chapter 13 case, a couple can determine whether this is the right solution for their situation.

How Can a Chapter 13 Case Be Severed?

When a Chapter 13 bankruptcy case is filed, the bankruptcy court will assign a bankruptcy trustee to oversee the case. This trustee is responsible for collecting payments from the debtor and distributing these payments to creditors according to the terms of the repayment plan. When a married couple files a joint bankruptcy case, multiple different types of debts may be included in their repayment plan, including debts that were in the name of one spouse prior to getting married and joint debts incurred during the couple's marriage. If the couple decides to get divorced, they may be able to separate their joint bankruptcy into two individual bankruptcy cases and determine how different debts will be allocated to each spouse.

When bifurcating a Chapter 13 bankruptcy, the bankruptcy court will look at the couple's bankruptcy schedules to determine which debts are joint and which are individual. The court may also consider whether any of the couple's property is jointly owned or whether certain assets are solely owned by one spouse. Once the bankruptcy court has made a determination about which debts are joint and which are individual, different debts will be allocated to each spouse. When dividing one Chapter 13 case into separate cases, new repayment plans will be created for each spouse based on the amount of disposable income available to each party.

After a Chapter 13 bankruptcy case has been severed, each spouse may need to determine whether they will continue making payments and attempt to complete their repayment plan or whether other options may be available. Either spouse may choose to convert their case to a Chapter 7 bankruptcy, which may be the best option if a spouse does not have the ability to make their required Chapter 13 payments. In some cases, a bankruptcy court may require that a spouse's bankruptcy case be converted to a Chapter 7 bankruptcy if their income decreases significantly after their divorce. In other situations, a spouse may choose to dismiss their Chapter 13 bankruptcy, which may be an option if they will have the means to repay the debts allocated to them in their divorce.

Contact Our San Antonio Bankruptcy and Divorce Lawyer

It is important for married couples who have filed for bankruptcy to understand all of their options as they decide how to address bankruptcy during the divorce process. At the Law Offices of Chance M. McGhee, our Schertz bankruptcy attorney can help you understand your rights and options under both bankruptcy and divorce law. We will work with you to determine whether severing, converting, or dismissing a Chapter 13 bankruptcy is the right solution for your situation. Call 210-342-3400 to set up a free consultation today.

Sources:

https://equaljustice.wy.gov/application/files/2715/5877/3861/Lund_IntersectionBKDiv112014.pdf

https://casetext.com/case/in-re-seligman-1