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Consequences of Bankruptcy in Family Law

Financial obligations in the context of a divorce can create a strain on the party ordered to pay. If a party is simply unable to keep up with all their obligations they may consider filing for bankruptcy. A bankruptcy filing generally results in an automatic stay meaning the party filing for bankruptcy is protected from creditors seeking payment from them until the bankruptcy is resolved however there are exceptions to this general rule. 11 U.S.C § 362 (b) provides that the filing of a bankruptcy petition does not operate as a stay for any proceeding regarding the establishment or modification of an order for domestic support obligations, concerning child custody or visitation, or for the dissolution of a marriage (including decree with court order or property settlement agreement except to the extent that such proceeding seeks to determine the division of property that is property of the estate). Accordingly, a party may not seek to dismiss all their obligations in a family law matter by filing for bankruptcy. Pennsylvania case law reiterates this point. In Schulze v. Schulze, 15 B.R. 106 (1981), the court held that "there can be no doubt that the state court action as it pertains to divorce and the custody of the minor children should not be stayed."

Another component of filing for bankruptcy is the potential for certain debts to be discharged, meaning the obligation no longer needs to be fulfilled. 11 U.S.C. § 523(a)(15) provides that a debtor cannot discharge a debt to a spouse, former spouse, or child of the debtor that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree, or other order of a court of record. This statute is interpreted to mean that a party cannot discharge an obligation to provide support. A party used to be able to discharge an obligation to split assets and/or debts under a property settlement agreement or order on equitable distribution. In Deichert v. Deichert, 402 Pa. Super. 415 (1991), the court discusses which marital obligations are dischargeable or non-dischargeable in bankruptcy and concludes the court is to look at the intent of the parties and/or the effect/function of the obligation since debts under property settlement are dischargeable but support obligations are not. However, amendments to the bankruptcy law in 2005 provided that any order arising under any family law docket including equitable distribution is no longer dischargeable.

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