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Is There An Advantage to Filing for Bankruptcy During a Divorce?

By Don Schweitzer

Contrary to popular belief, when a spouse files for bankruptcy during a divorce there really is no advantage. If anything, it prolongs the finalization of the divorce since there is a hold on the divorce until the bankruptcy proceedings have concluded.

A recent appellate court decision* illustrates my point well. In this case, Ms. Walker, the wife, filed for Chapter 7 Bankruptcy during the divorce. She listed the parties’ family home and reported a secured claim in the amount of $103,000 held by the bank. The bankruptcy court granted her a discharge from her debts under chapter 7 of the Bankruptcy Code, which included the bank claim.

When escrow closed on the sale of the family home, the bank, which was the holder of the second trust deed, was paid $95,732.90 through escrow. After payment of the secured loans and closing costs, the sale of the family home netted $176,580.42.

Despite the fact that both Ms. and Mr. Walker had equal ownership in the home interest, Ms. Walker requested that the disbursement of funds should not result in a 50/50 split. The trial court agreed with Ms. Walker’s argument, and ordered the sale proceeds disbursed in accordance with her request—$134,089.66 to Ms. Walker and $42,490.76 to Mr. Walker.

Fortunately for Mr. Walker, however, the Court of Appeal reversed the trial court’s ruling, holding that the principles of community property required both parties to absorb equally the burden of extinguishing the lien.

Without a doubt Mr. Walker must have felt more than a little frustrated when his wife attempted to out maneuver him by filing for bankruptcy protection during their divorce and by convincing the trial court to rule in her favor. But, with a lot of patience and by not giving up, he was able to defeat her attempt to gain a larger portion of their community estate.

* Marriage of Walker

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