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
March 2003
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 |
 The 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. |