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Escaping a Chapter 13 Case Filed Jointly with Your Spouse

June 19, 2017 by Chris Kane

If you filed a Chapter 13 adjustment of debts case jointly with your spouse but are now considering divorce, how do you get out of the case? 

 

When a Chapter 13 Case Outlasts a Marriage

A Chapter 13 “adjustment of debts” case usually lasts three to five years. A lot can happen in that time. If you filed the case jointly with your spouse you might end up getting divorced before the case is finished.

There are rare exceptions but continuing the case without any change will almost never make sense. Among other reasons, your Chapter 13 case is built around your monthly expenses, which will almost certainly change. More basic, your case was built around common goals, which will presumably change with a divorce.

Most likely one or both of you will need to get out of your Chapter 13 case. What are the ways that you can do this?

Dismissal

You can almost always get out of a Chapter 13 case simply by having your lawyer dismiss it. A dismissal is a voluntary ending of the jointly filed case.

In contrast, a Chapter 7 “straight bankruptcy” can be harder to dismiss. Why are Chapter 13s easier to dismiss?

It’s likely because bankruptcy law recognizes that committing to a 3-to-5-year Chapter 13 case is a big deal. To encourage you to make the commitment, the law allows you to freely leave it if you want to later. You’re more likely to do it if you know from the beginning that you’re not legally bound to finish it.

So if you and your spouse are now on the brink of divorce, you can file a simple motion to dismiss your case. In most cases it is granted quickly.

After dismissal, each spouse/ex-spouse can decide what is then best for him or her—a new individual Chapter 13 case, a Chapter 7 one, or neither.

Conversion to Chapter 7

Your joint Chapter 13 case can also be converted into a joint Chapter 7 case.  A converted Chapter 7 case usually takes about 3 or 4 months to finish. It may be a good way to clean up some financial matters before you go ahead with the divorce.

Besides this timing advantage, converting from Chapter 13 to 7 makes sense if the purpose you filed under Chapter 13 no longer applies. For example, you may have wanted to save the family home from foreclosure, but if you are getting divorced that may be both less important and less financially feasible. Converting the case into a Chapter 7 one results in a discharge (legal write-off) of most or all your debts. That does not happen when you merely dismiss a Chapter 13 case.

Severing a Chapter 13 Case into Two Separate Cases

Your joint Chapter 13 case can be “severed” into two separate Chapter 13 ones. The bankruptcy court routinely allows this, including if the spouses are getting divorced.

Once the case is severed into two, each person can then independently do whatever is in that person’s best interest.

One or the other person (or both) may have a good reason to continue under Chapter 13. For example, her car may be being paid through a favorable cramdown. Or her personal income taxes may be being paid through the plan without additional interest, penalties, or threat of collections by the IRS or the state. So that person could file a new amended Chapter 13 plan with such benefits while incorporating the changed financial circumstances.

One or the other person (or both) may instead convert his or her case into a Chapter 7 one.  That person would do that if there’s no more reason for that person to be in a Chapter 13 case.

Either person can also, after the case is severed into two, dismiss his or her case while the other continues in bankruptcy. A dismissal results in no discharge of debts. That’s because a discharge does not occur under Chapter 13 until a successful completion of a case. So a dismissal seldom makes sense without being followed by a new Chapter 7 or 13 case.

Conflict of Interest and Client Secrets Issues

Lawyers are ethically not allowed to represent two people at the same time who have interests that are in conflict with each other. Nor can they simultaneously represent two people who will likely share secrets or confidences with the attorney that need to be kept from the other person.

When two spouses are seriously considering divorce, their interests usually diverge. And each spouse will likely tell the lawyer things this spouse doesn’t want the other spouse to hear.

So at some point the lawyer representing the spouses in a jointly filed Chapter 13 case can’t represent them both. At that point, the spouses have to get separate lawyers. They have to get independent legal advice and legal representation about how to make the choices discussed above.

 

Filed Under: Bankruptcy And Divorce Tagged With: conflict of interest, conversion to Chapter 7, discharge debts, dismissing a case, severing case, severing Chapter 13 case

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