Leveling the Playing Field: Lessons of Bankruptcy and Divorce

We’ve all heard stories of couples who have decided to divorce citing “money” as a key factor in the demise of their marriage. We have also witnessed businesses and franchises collapse due to financial distress and bankruptcy. However, it is not often that these two subjects merge as is the case of the Los Angeles Dodgers bankruptcy filing as a result of
the owners’ divorce proceedings.

While Los Angeles Dodgers Administration and its sports agenda plays out on the West Coast, the story holds insight for Southeastern Pennsylvania divorce cases. Bucks County couples experiencing the stress of an impending divorce, along with financial insolvency, may attempt to mitigate their financial difficulties in any kind of property settlement negotiation. Often times however, that can lead to the unintended consequence of losing property that might otherwise be preserved for the after-marriage portion of life.

Under certain circumstances, filing a joint bankruptcy petition prior to the divorce can determine the financial responsibilities that remain after the divorce degree is issued, as well as, preserve the property acquired during the marriage to greatest extent permissible under the law.

During the collaborative divorce proceedings, couples can meet with a financial planner to see if a joint bankruptcy filing is the best course of action before a divorce is final. A divorce court, however, will not order a couple to file bankruptcy opting instead to just split up the debt between the parties.

While bankruptcy is not usually the first choice of divorcing couples, for some it can prove to be the right option especially in this economy. If the parties are in a small business, bankruptcy can protect business assets and income for the support of the children.

Contrary to popular belief, a bankruptcy filing does not offset anyone’s obligation to pay for alimony or child support, nor does it affect property division as these are not dischargeable obligations.

Another myth I hear is that if someone files bankruptcy they will lose everything they own. Nothing could be further from the truth. Under a joint bankruptcy petition couples can improve their ability to exempt certain property from the reach of their creditors. The net effect is to provide each person with as much property as possible for the post-divorce phase of life.

In my experience, the overwhelming numbers of financially strapped people are not on the brink of bankruptcy because they are unwilling to pay their financial responsibilities, but rather because they are unable to. Usually the reason for the inability to pay is because either there was an unexpected loss of income or because of unexpected and uncovered medical expenses. Sometimes it is because of both.