Phyllis Law - May 2020 | 404.514.3397

Protecting Bright Futures

MAY 2020

Bright Futures Bulletin

The two most common bankruptcies filed by consumers are Chapter 7 and Chapter 13. Chapter 7 is a liquidation of assets, whereby the trustee gathers the debtor’s nonexempt assets to pay the creditors. From start to finish, a Chapter 7 case takes about four months unless someone objects to discharge. Chapter 13 is much more complicated. It requires a repayment plan over a five-year period. A complicated formula is used to determine the monthly payment. Often, the court sets a monthly payment higher than what the debtor can pay. That is why 75% of Chapter 13 plans fail. To qualify for Chapter 7, debtors must pass a means test. If disposable income is too high, debtors will not qualify and will have no choice but to file Chapter 13. Chapter 7 is the preferred bankruptcy, and it makes sense for a couple to collaborate when possible to maximize their chances of passing the means test. After all, if you want to get support payments from your spouse, you are much more likely to receive payments on time if your spouse is not drowning in debt. It is important for divorcing couples to seek advice regarding bankruptcy before they file for divorce. Timing is key. A bankruptcy attorney and a divorce attorney can collaborate to decide which case to file first. Sometimes, debtors are more likely to pass the means test if they file together before divorcing. Couples are not required to live together to file bankruptcy together. They can file as married but separated and claim expenses for a second household. That can help couples with high income to pass the means test. Sometimes, it makes more sense for just one spouse to file alone, and that can happen before or after divorcing.

WhenBankruptcy andDivorce COLLIDE

I participated in my first webinar last month, “Bankruptcy and Divorce.” My friend and colleague Bill Gentry of The Gentry Firm organized the webinar and invited me to be the guest speaker. Bill weighed in as the expert on divorce, and I was the bankruptcy expert. I encourage you to check it out on my YouTube channel (search for Phyllis Collins). This article is a preview of that webinar. There are a few basics to understand about bankruptcy and divorce. When a bankruptcy petition is filed, an automatic stay goes into effect immediately. The automatic stay is an injunction that stops actions by creditors (with limited exceptions) making collection actions. In most divorce cases, parties have property that must be divided. Therefore, the stay is going to apply to the divorce case. Usually the spouse who did not file worries that theywill not get their child support and/or alimony payment if a bankruptcy is filed. However, those debts are nondischargeable in bankruptcy. So, while payment may be delayed, it will not be avoided.

If you are considering separation or divorce and one or both spouses have crippling debt, call me for a free

consultation. It is better to explore all your options before acting. Do not wait until you are in the middle of a divorce to talk to a bankruptcy attorney.

–Phyllis Gingrey Collins

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