Bankruptcy filings during divorce: What happens next?

Family law attorneys work tirelessly for their clients. Despite these efforts, even the best of plans can be adversely impacted when one spouse files for bankruptcy in the midst of divorce proceedings. This article unpacks how a bankruptcy filing can impact the divorce process and outlines when-and how-family law practitioners can move forward.

Automatic stay

A bankruptcy filing results in the imposition of an automatic stay under Bankruptcy Code Section 362. The automatic stay enjoins proceedings affecting the debtor and property of the estate, including commencing or continuing lawsuits that were or could have been started prior to the bankruptcy, enforcing judgments or liens, taking or controlling estate property, collecting on pre-bankruptcy debts and offsetting debts owed to the debtor that arose before the bankruptcy case.

Certain domestic matters are excluded from the stay, however, including paternity actions, domestic support orders, child custody or visitation, dissolution of marriage (unless it involves diving estate property) or domestic violence proceedings. 11 U.S.C. § 362(b). Other exceptions to aid in enforcement of domestic support obligations include, among others, collecting support not part of the estate and wage withholdings that are property of the estate or property of the debtor. 11 U.S.C. § 362(b).

Relief from automatic stay

Relief from the automatic stay is necessary to divide marital property that is estate property.  The bankruptcy court may grant relief "for cause" under Bankruptcy Code Section 362(d)(1). Cause is not defined and is decided on a case-by-case basis. Courts consider factors like judicial economy, state court expertise and estate interests. Bankruptcy courts generally defer to family courts in such matters. See, e.g., MacDonald v. MacDonald (In re MacDonald), 755 F.2d 715, 717 (1985); In re Sandoval, 619 B.R. 417 (Bankr. C.D. Cal. 2020) (stay modified by treating any property division by family court as a proposed settlement subject to bankruptcy court approval); In re Badalamenti, 2025 WL 1012836 (Bankr. D. S.C. 2025) (stay modified to allow family court to determine the equitable apportionment of marital assets and liabilities with bankruptcy court retaining ability to review determination as it may relate to estate property).

Property of the estate

The filing of a case creates an estate that includes "all legal or equitable interest of the debtor" as of the commencement of the case, with certain exemptions or exclusions. 11 U.S.C. § 541(a)(1).

The estate includes all interests of the debtor and the debtor's spouse in community property as of the bankruptcy petition date that is under the debtor's sole, equal or joint management and control, or liable for certain claims. 11 U.S.C. § 541(a)(2); Damas v. Mantle (In re Mantle), 153 F.3d 1082, 1085 (9th Cir. 1988), cert denied, 526 U.S. 1068 (1999)("all community property not yet divided by a state court at the time of the bankruptcy filing is property of the bankruptcy estate.")

The estate also includes any interest in property that would have been property of the estate as of the petition date and that the debtor acquires, or becomes entitled to acquire, within 180 days of the petition date, by inheritance, divorce or death benefits. 11 U.S.C. § 541(a)(5).

In individual Chapter 11 and Chapter 13 cases, the estate also includes post-petition property and earnings from services performed before the case is closed, dismissed or converted, whichever occurs first.  11 U.S.C. §§ 1115(a) and 1306(a).  

Bankruptcy discharge

Individual debtor receives a discharge in bankruptcy upon its completion. The discharge eliminates personal liability for most debts existing as of the bankruptcy petition date. Among exceptions to discharge are domestic support obligations and property division debts.

A domestic support obligation (DSO) is a debt (including interest) for alimony, maintenance or support, owed to or recovered by a spouse, former spouse, child of the debtor or governmental unit that is established or subject to establishment before, on or after the bankruptcy filing and based on a separation agreement, divorce decree or property settlement agreement, court order or government determination. It can't be assigned to a non-governmental entity, except for collection purposes. 11 U.S.C. § 101(14)(A). To determine whether an obligation is a DSO requires focusing on the parties' intent and the debt's substance, not just the language of the decree or agreement or the payee's identity. DSO debts are excepted from discharge (i.e. non-dischargeable) under Bankruptcy Code Section 523(a)(5).

A property division debt to a spouse, former spouse or child of the debtor-non-DSO debts-incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other court order or government determination are excepted from discharge under Bankruptcy Code Section 523(a)(15). They are nondischargeable in Chapter 7 and 11 but dischargeable in Chapter 13 after the plan is completed.  

These two exceptions are automatic, and no adversary complaint is required to be filed in the bankruptcy court but consider doing so if concerned about these debts. In re Donnelly, 2025 WL 2025040 (Bankr. S.D.N.Y. 2025)(attorney's fee awarded to former spouse in matrimonial action, payable directly to her divorce lawyer, was ruled non-dischargeable under sections 523(a)(5) and 523(a)(15)).

Preferences and fraudulent transfers

Preferences   

Under Bankruptcy Code Section 547(b), a trustee may avoid "preferential transfers." These are "transfers of an interest of the debtor in property" made to or for the benefit of a creditor, on account of an antecedent debt, while the debtor was insolvent, within 90 days prior to the bankruptcy petition date (or within one year if to an insider), and the transfer enabled the creditor to receive more than it would have received in a Chapter 7 case. Section 547(c) lists affirmative defenses, including that transfers to satisfy a DSO debt are not subject to avoidance under section 547(c)(7). 

Fraudulent transfers          

A bankruptcy trustee may avoid a transfer made or an obligation incurred by the debtor within two years before the bankruptcy petition for actual or constructive fraud under Bankruptcy Code Section 548. Bankruptcy Code Section 544(b) provides the bankruptcy trustee with the same rights that a creditor would have under state law. The California Uniform Voidable Transactions Act (UVTA), Cal. Civ. Proc. Code § 3439, et seq., formerly known as the Uniform Fraudulent Transfer Act, provides that transfers or obligations can be avoidable (invalid) because of actual or constructive fraud. Thus, the bankruptcy trustee can scrutinize, for example, a marital property agreement and potentially challenge the agreement under Bankruptcy Code Section 548 as well under California fraudulent transfer law. Mejia v. Reed, 31 Cal.4th 657 (2003)(confirmed that the UFTA applies to marital property transfers).  

Practical considerations

These considerations are intended to help family law lawyers move forward in the event one spouse files for bankruptcy during divorce proceedings. Upon the bankruptcy filing, assess the application of the automatic stay and exceptions and take appropriate action. If filing for relief from stay motion, use required forms, consider submitting optional separate memorandum of points and authorities, and schedule hearing under applicable local rules. Consider seeking a ruling that the stay does not apply, if applicable. In addition, keep informed on the bankruptcy proceedings, including being mindful of any DSO and property division claims and their treatment in bankruptcy, and pursue rights as warranted. Further, consider preferential and fraudulent transfer laws and potential claims and defenses for past conduct and to inform future actions.