Pending divorce could alter bankruptcy

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Dear Bankruptcy Adviser,
We are paying the trustee for our Chapter 13 bankruptcy (repayment plan), and my husband has just said he wants a divorce. What do we do with the bankruptcy? Do we stay married until the bankruptcy case is over?
— Linda

Dear Linda,
You have options, but it is very important that you act before you start falling behind on your Chapter 13 plan payments. While you may be battling depression or simply in denial, avoiding the situation will prove to be the worst alternative.

As you know, a Chapter 13 bankruptcy includes a repayment plan of some or all of your debt over a three- to five-year period. Here are two major reasons someone files for Chapter 13 bankruptcy:

  • You want to save a valuable asset. If your house is about to go through foreclosure and you want to save it while catching up on the delinquent payments, you can protect it inside a Chapter 13 bankruptcy.
  • It is determined that you earn too much income to file for a Chapter 7 bankruptcy and can afford to pay back some or all of your debt over the next three to five years.

A change in financial circumstances like a divorce, loss of employment or illness is a legitimate reason to modify your bankruptcy. I don’t know specifically why you filed for the Chapter 13. But you might be able to lower the monthly payment, suspend payments for a period of time or convert to a Chapter 7, aka “fresh start” bankruptcy.

You will need to contact the trustee — the court-appointed attorney or accountant managing your case — and inform him or her of the pending divorce and provide proof you are living in the separate households. You may be able to convert your case from the Chapter 13 to a Chapter 7 if the increased household expenses are significant enough. However, you will need to file the appropriate documents and have your case reviewed.

While this might sound morbid, you have to be sure you are getting divorced. Simply stating to the trustee that your husband wants a divorce does not mean that either of you is moving out of the house. I am always cautious with clients who claim they are separating because this could simply not be the case. Financial stress routinely is the cause of marital stress. However, you will likely need to show that the party moving out has proof of a new home or rental agreement, and/or utility statements.

You must act quickly because if the changing finances mean that you will miss a Chapter 13 plan payment, then you are responsible for notifying all necessary parties. Whatever you do, don’t take the “ostrich approach,” sticking your head in the sand and hoping things work out.

They never do.

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