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DIVORCE AND BANKRUPTCY

 

Advisability of Joint Bankruptcy Filing and Conflict of Interest Problems

This discussion of joint bankruptcy filing is from “Overview of Arizona Divorce Principles for Bankruptcy Practitioners” by John McKindles

John McKindles

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Table of Contents

A. Community Property

B. Separate Property

C. Liability for Debts of Spouse

D. Jurisdiction to Control and Dispose of Community and Separate Property Assets

E. Jurisdiction to Determine Separate Property Rights

F. Jurisdiction Over Allocation and Disposition of Debt

G. ERISA Retirement Plans and the Bankruptcy Estate

H. Community Property and the Bankruptcy Estate

I. Priority of Past Due Support Over Other Creditors

J. Protection of Dissolution and Lien Rights

K. Advisability of Joint Bankruptcy Filing and Conflict of Interest Problems

L. Impact on Future Community Property Interests

M. Impact of Discharge on Secured Debts

Mesa divorce and community property attorney John McKindlesThe benefits of a joint bankruptcy filing appear obvious: the parties get a two-for-one break on attorney’s fees and the Bankruptcy Court filing fee. After a Decree of Dissolution is entered, the parties cannot do a single petition for both. This may be a significant consideration, since, if one of the parties appears inevitably hurtling toward Bankruptcy Court, similar factors are also pushing the other spouse toward bankruptcy.

There may be certain strategic advantages, depending upon the factual circumstances, for one of the parties to avoid filing during the divorce proceedings. For example, one spouse may negotiate an agreed decree that calls for that spouse to assume the bulk of the unsecured debt of the community while receiving the bulk or totality of the exempt assets as well, having in mind a quickly filed Chapter 7 after the decree is entered. If the spouse contemplating this strategy files a Chapter 7 after assuming liability for $50,000 in credit card debt, holding the non-debtor spouse harmless therefrom, while at the same time being awarded all of the equity in a marital residence together with the bulk of retirement funds, this places the non-debtor ex-spouse in the unenviable position of having to file an adversary action to challenge the dischargeability of the unsecured debt under § 523(a)(15). This requires an investment of money and alacrity on the part of the non-debtor ex-spouse, who likely has just wiped out his or her reserve funds in attorney’s fees under the divorce action.

Should the non-debtor spouse wait too long or think better of expending the funds to challenge the dischargeability of the debtor spouse’s assumption of the unsecured debt, the non-debtor spouse could possibly return to the divorce court in order to revisit the property settlement agreement that would now reflect the less than equitable distribution of the debts and assets of the marriage, but only if the court has retained jurisdiction over the issues contained within the property settlement agreement.

The cleanest approach would be for both parties to positively consider processing a Chapter 7 or 13 prior to the entry of a Decree of Dissolution of Marriage. This would also avoid potential complications under A.R.S. § 523(a)( 15).

Counsel for either of the parties in a dissolution action would see obvious inherent conflicts with representing both parties for the purpose of a bankruptcy. Even if the essential terms of the de­cree are agreed to under a consent decree or like vehicle and both parties are initially willing for the attorney to represent both of them in a bankruptcy action prior to entry of the decree, such an assumption of authorization and liability on the part of counsel in fraught with peril.