The two proceedings regularly clash together, and when they do, it may create numerous issues calling for resolution. There are three interested parties in the marital and bankruptcy proceedings. One is bankrupt, the second is the bankruptcy estate (on behalf of all the creditors in general), and third is the non-bankrupt spouse or another bankruptcy estate if both former spouses filed for bankruptcy protection. The common disputes could involve property, child/spousal support payments, equalization claims by either of the parties and joint debts. The non-bankrupt spouse is the one who is likely to be blindsided and swirled into the former’s partner bankruptcy proceedings.
Property, if any of value, can be the centerpiece of both proceedings. Marital proceedings deal with the division of the property between the spouses. But upon a bankruptcy all property of the bankrupt vests with the trustee. In this context the property includes any interest that bankrupt may have. For example, if real property is legally owned by the two spouses on a basis of a 50/50% interest, the bankrupt’s 50% interest will vest with the trustee. It’s their role to realize on that interest by selling, or otherwise disposing of the property in question. If you are a non-bankrupt spouse and have joint ownership of the property of the bankrupt, especially real property, of significant value, it is recommended that you consult a licensed insolvency trustee of your choice and/or an insolvency lawyer to ascertain your position, protect, or enforce your interest. Alternatively, do your own research and remain vigilant with respect to your rights.
The bankruptcy and insolvency laws safeguard spousal and child support obligations. Therefore bankruptcy of the payor does not release her/him of the obligation towards this type of debt. Moreover the arrears of the support payments have (limited) priority in the distribution of the funds realized for the benefit of the bankrupt’s estate. Filing a proof of claim by the recipient of the support payments with the licensed insolvency trustee of the payer is critical for the eligibility for any payment out of the bankruptcy estate. Bankruptcy of the recipient of the support obligations does not alter her/his entitlement to the payments. Both the bankrupt and non-bankrupt spouse should resort to the family law proceedings to seek any revisions to the amount payable from one to another.
In contemplation of a bankruptcy, the debtors should help the trustee to ascertain the existence of any equalization claims. It is important that the trustee is made aware of the claims and is able to review relevant documents. Non-bankrupt spouse’s equalization claims are currently considered an unsecured claim by the legislature meaning that it will be released upon payor-bankrupt’s discharge. The claim does not enjoy any priority status either, like support payments. The dollar value of these claims, however, might be quite substantial and the facts surrounding them would likely prompt a major exploration during bankruptcy administration and, most importantly, at the bankrupt’s discharge hearing. If you are the claimant with equalization rights, you have to act without delay upon receipt of the bankruptcy notification. There might be further alternatives in pursuit of the equalization payment even after the discharge of the payor-bankrupt but it may come with a further price tag. If former spouse who has the right to pursue an equalization payment files for a bankruptcy, the trustee would be in a position to enforce that right to the claim or the claim itself against the non-bankrupt spouse.
In case of any joint debts, the non-bankrupt spouse remains liable for the unpaid balance of the joint liability, notwithstanding the bankruptcy of her/his former partner. If the non-bankrupt spouse pays off the obligation towards the joint debt, she/he does not have the right to claim reimbursement of the funds from another spouse bankruptcy estate. In this context, joint debt stands apart from a debt arising out of surety, guarantee or indemnity. Also, joint credit card debt should be distinguished from the status of being a supplementary card holder (the determination is not always clear, though). In the later situation, the card holder does not necessarily become liable for the unpaid balance.
It would seem appropriate that despite separation/divorce, the parties would keep communication channels open prior to any major events such as bankruptcy of one or both and when substantial rights may be affected by it. The practice shows that in many instances it is not the case. At the end of the day, the typical consequences are the increased legal costs and aggravation caused to EACH side before finding a resolution.