Divorce and Bankruptcy

    Sometimes, surviving a divorce is only half the battle. The rest of the conflict often ensues in bankruptcy court. According to “The Fragile Middle Class: Americans in Debt,” 40 percent of individuals who file for bankruptcy do so as a direct result of divorce, medical crisis or unemployment.   

“The main reason people get divorced is because of money," said Matthew Weber,  a certified public accountant for Citrin Cooperman & Company . "It’s hard enough to make ends meet when you are a single household. Sometimes it is even harder to operate two households.”    

How a bankruptcy affects someone who is divorced depends a lot on the settlement agreement. A primary concern, for the spouse owed money, is what will happen to spousal support, child support and property settlements,  said Weber, a forensic accountant. “The rules (for bankruptcy) are pretty straightforward,” he said, adding, “The cases are pretty complicated.”   

Former New Jersey Gov. James E. McGreevey appears to be struggling with this very situation. 

On Wednesday, McGreevey told a judge that he wants to pay child support for the 6-year-old daughter he has with his estranged second wife, Dina Matos McGreevey, as well as for a child from an earlier marriage, but he cannot afford to pay alimony. He says he works two jobs, makes $48,000 a year, pays $11,000 a month in expenses and owes a quarter-million dollars to his boyfriend, Mark O'Donnell, for legal fees.

"I want to pay child support. I want to fulfill my obligations," McGreevey was quoted in an article by The Associated Press. "Unfortunately, I have had to bankrupt myself to pay legal fees upon legal fees."

McGreevey, 50, is $11,000 behind in his child support to Matos McGreevey, who wants to maintain the lifestyle she would have had with her husband had he not had to resign in 2004 during a gay sex scandal. The two have lived apart since he declared he was gay. In the financial phase of the couple's divorce trial this week, McGreevey has said he simply cannot afford paying alimony to his former wife, who is going to lose her $82,000-a-year job as a hospital administrator when the hospital closes soon. If your ex files for bankruptcy, all creditors -- including you if you're owned spousal or child support -- would receive notification from the court. Then you have to file a claim right away or " the court can discharge” the debt, Weber said. “People who are creditors in bankruptcy would be well advised to assume the worst about what the judge will decide,” said attorney and divorce mediator Lee Borden.

Weber said many people go back to their divorce attorney when they discover their ex has filed for bankruptcy, which is not a good idea. “It’s very important that if this is going on, that they retain a bankruptcy professional,” he said. Borden agreed, saying “Most people who are filing for bankruptcy are doing it with the help of a bankruptcy lawyer,” and that it makes sense that, as a creditor, you'd want a bankruptcy lawyer, too.  


ALIMONY AND CHILD SUPPORT

Thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), individuals who are owed child or spousal support are protected from losing those funds in court. According to Borden, the laws that served primarily as a bankers’ protection bill also helped with family law claims. “All family law claims are now called first priority. That means that they enjoy a priority when it comes time for the trustee to decide who gets paid and who doesn’t,” Borden said.   

Another primary difference, thanks to the BAPCPA, is debtors no longer have the right to enjoy an “automatic stay” when it comes to certain family law claims. “When you file for bankruptcy … One of the very first things that happens is that all creditors have to quit picking on you for a little while,” Borden said. “What the automatic stay says is that when I file for bankruptcy you can’t pick on me for a while. It’s a powerful incentive for people to file for bankruptcy.”  

Before the protection act, Borden said lawyers couldn’t prosecute the family law claims until the end of the automatic stay. That, however, is no longer the case when it comes to child support and spousal support. “Child support and alimony, both of these are current supports, can be processed and prosecuted even despite the stay,” Borden said. “It in fact, now enjoys a privileged position.”  

Weber echoes Borden’s claim, “Support, whether it’s child support, maintenance, alimony, are not discharged,” he said.  This rule, Borden said, does not apply to property settlements or back support.  

Borden also warned that bankruptcy judges have a primary objective to assist the debtor, not the creditor. “Bankruptcy judges view the world through discharged colored glasses. They are all about helping debtors to get back on their feet,” he said. “They want to get the debtor as fully discharged as possible.”