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Chapter 13 Filing after Divorce

You were married with a family. Now you have finished a difficult divorce. The circumstances exhausted you and caused much heartache. Not only was it emotionally taxing, it was also financially draining.

You and your spouse were living together under one roof and both of you contributed to the household costs. Then you split from your spouse and have to pay all the expenses yourself. You had to pay your share of costs associated with the divorce: legal fees, accounting fees, psychological evaluations, therapy sessions. Furthermore, the circumstances of your divorce caused you to miss time from work, further decreasing your take home pay.

In addition to these expenses, you are now required to pay court-ordered child support and alimony. The enormous costs have weighed on you emotionally. You feel hopelessly behind in your bills and you need a way out that works. Chapter 13 bankruptcy may be right for you.

Chapter 13 in General

In contrast to Chapter 7 or “straight bankruptcy,” Chapter 13 provides wage earners a more generous way out of debt. Colloquially known as the “wage earner’s” bankruptcy, consumers seeking a fresh start and earning a wage can benefit from Chapter 13. When an individual emerges from Chapter 13, the consumer will find that debts will generally be discharged so that the consumer can enjoy a fresh start.

Prior to filing, an individual seeking consumer bankruptcy protection must attend counseling. Upon approval that counseling has been completed, the individual wage earner can file for Chapter 13 bankruptcy protection.

Like other chapters in the United States Bankruptcy Code, a debtor filing a Chapter 13 bankruptcy petition enjoys the protection of the “automatic stay.” The automatic stay bars creditors from collecting debt owed from before the bankruptcy filing, or stays debt collection. The automatic stay provides the debtor with breathing room to focus on reorganizing finances and allows for collection calls and harassment to stop.

Under Chapter 7, a debtor creates a bankruptcy estate, similar to trust estate after the death of a family member, to pay off creditors. The bankruptcy estate holds the debtor’s property, minus certain exempted property, that is to be liquidated and distributed to creditors. Hence the name “straight bankruptcy.”

Under Chapter 13, in contrast, there is no bankruptcy estate; instead, the debtor submits a payment plan that will pay creditors over a three or five year period. Once the plan is approved, the debtor pays creditors, through a Chapter 13 bankruptcy trustee, according to the plan’s terms. During that time, creditors cannot start or continue collection efforts.

Chapter 13 advantages over Chapter 7:

Chapter 7 Chapter 13
Stays on credit report for 10 years Stays on credit report for 7 years
Cannot reschedule secured debt Can reschedule secured debt over the life of the plan, often lowering the payments
Does not protect third party co-signors May protect third party co-signors

Chapter 13 and Divorce

Bankruptcy law dictates that all debt owed to a former spouse are not dischargeable in bankruptcy. In 2005, Congress passed the Bankruptcy Abuse Prevention Consumer Protection Act, or BAPCPA, which considerably narrowed the scope of a bankruptcy discharge regarding divorcing couples. This debt includes alimony, child support or any debt relating to the marital relationship.

Moreover, bankruptcy judges are unlikely to modify alimony or child support payment during the life of the Chapter 13 plan. Thus, a divorcing spouse will continue to pay the full amount of marital maintenance even though there will likely be significantly lower payments to other creditors.

Another issue is co-owned credit card debt. Often times married couples will open a credit card that is under both of their names. A common misconception is that each spouse is responsible for fifty percent of the payments; in reality, each spouse is one hundred percent responsible for co-owned credit card debt. While the bankruptcy process stays the credit card company from making collection efforts against the bankrupt spouse, each former spouse still has responsibility for the debt. As a result, the bankrupt spouse may owe the other spouse for co-owned credit card debt. This is applicable regardless of who racked up the debt. And that debt, due to its status as marital debt, is not dischargeable in bankruptcy.

If you are divorcing or have divorced, earn a wage, and find yourself in massive debt, Chapter 13 may be a very effective tool in your return to financial stability. However, you need to understand the interplay between divorce and bankruptcy. For a complete understanding, you should contact the Law Offices of Melanie Tavare Esq. who will help you navigate the complex bankruptcy process.


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