Going Your Separate Ways---In Chapter 13 Bankruptcy
[caption id="attachment_2295" align="aligncenter" width="300"] Image by Jennifer Pahlka, courtesy of Wikimedia Commons[/caption] A Chapter 13 bankruptcy is a 3-5 year "payment plan" in which you repay some of what you owe to your creditors based on your ability to repay them after your necessary household expenses are taken into account. A Chapter 7 or a Chapter 13 bankruptcy can be filed "singly" by a married person, leaving one spouse out of the process, or "jointly," including both spouses. What happens in a Chapter 13 bankruptcy that is filed jointly when the participating spouses decide to divorce?
Divorce Is an Adversarial Process
The first point to keep in mind is that, even when a divorce or separation is amicable, it remains an adversarial process from a legal standpoint. Thus, although family and marital law differs from state to state, a divorce is always accomplished by way of a lawsuit in which one spouse is plaintiff and one spouse is defendant. Further, a divorce will generally involve some discussion of the dispersal of marital assets, the consideration of child custody if there are any, and the sharing or allocating of "marital debt" (debt to which both spouses are contractually obliged, which may be debt treated in full or part by the ongoing Chapter 13). Thus, once a divorce is initiated (or even considered, sometimes), two former "non-adversaries" are likely to become adversaries. The up-shot of that new adversarial relationship is that a joint Chapter 13 bankruptcy is often no longer feasible, both from that legal standpoint and from the more practical standpoint of the separation of a joint household into two, separate households with two, separate budgets. As to that second consideration, a Chapter 13 bankruptcy, once confirmed (approved) by the court, requires a monthly payment made to the bankruptcy court that is premised upon the joint income and joint expenses of a married couple (even if not filing together, jointly). Once any disruption to that budget underlying the agreed-upon monthly payment occurs, a Chapter 13 payment plan must be modified, or the case even converted to Chapter 7 or dismissed entirely. A divorce is certainly a plan-interrupting disruption of that sort. It is the transformation of the legal relationship between the two spouses, however, that most immediately impacts the Chapter 13. A divorce, as noted above, can, by way of a court-enforced divorce judgment, allocate the responsibility for the payment of certain debts owed by both spouses to just one of them and create a responsibility for the turnover of certain assets by one spouse to the other. That divorce judgment creates a contractual obligation imposing burdens of one sort or another to one or both of the spouses. That obligation, if marital debt is at issue particularly, creates a debtor-creditor relationship between the divorcing spouses. In bankruptcy, creditors and the filing debtor are always adversaries.
Prior Attorney Representation & Conflicts of Interest
This newly adversarial relationship nearly always creates a legal conflict of interest for the attorney who has, up to the point of the divorce, represented the couple in the Chapter 13 process. A bankruptcy attorney representing a married couple in a joint bankruptcy owes each of them a full and district representation and is obligated to represent each of the aggressively with respect to all of their creditors and other adversarial parties. When the married couple becomes adversarial to one another, it becomes an impossibility in most cases for the attorney who formerly represented them to continue representing either of them. Thus, their attorney will in most cases need to withdraw from the representation, and each spouse will need to find new, separate counsel.
Severing or Bifurcating a Chapter 13 Case
So what happens to the Chapter 13 case itself? While there may be occasions in which it is possible for a Chapter 13 bankruptcy to continue as-is under such circumstances, generally, the case will need to be bifurcated or severed. A bifurcation or severing of the case means that the case will be split into two separate cases, with each spouse then, with new counsel, given the opportunity to remain in Chapter 13 bankruptcy or, if the new household income and expense (and many other considerations) warrant, convert to Chapter 7 bankruptcy.
Divorcing While in a Joint Chapter 13 Bankruptcy: The Bottom Line
The bottom line is that, if you are in a jointly filed Chapter 13 bankruptcy and are considering a divorce, you need to prepare yourself for an enormous amount of change, not just within your household but also within your case. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
If you enjoyed reading "Divorcing While in a Joint Chapter 13 Bankruptcy," please browse our other articles on our main Michigan Bankruptcy Blog.