Divorce and Bankruptcy: Key Insights on Property Division and Debt

Divorce is a leading cause of bankruptcy.  The financial costs of establishing separate households and dividing property and paying spousal support and child support often create difficulties in paying for consumer debts incurred during the marriage.  Divorcing spouses who are facing financial difficulties may need to consider the possibility of bankruptcy, either during or after the divorce process has been completed.

An important consideration for a spouse in these circumstances is how a bankruptcy court will classify the spouse’s property and income after the divorce case has ended.  This may affect the spouse’s negotiating strategies during the divorce case.

In Diener v. McBeth (9th Cir. Bankr. 2012), 483 B.R. 196, the Bankruptcy Appellate Panel for the United States Court of Appeals for the Ninth Circuit (which includes California) affirmed the trial court’s decision that a retirement account awarded to the wife under the parties’ marital settlement agreement (“MSA”) could not be classified as spousal support for purposes of the statutory exemptions from creditors’ claim.

The wife had argued that she had been awarded the retirement account in exchange for waiving spousal support, such that it should be considered a form of spousal support and exempted from creditor’s claims.  The trial court disagreed, and the Court of Appeals affirmed.

The Court of Appeals held that the award of the retirement account was just a routine division of property, and was not exempt from creditors’ claims in the bankruptcy court.  The parties had not specified in the MSA that the award of the retirement account was a buy-out of spousal support.  Thus, the exempt status of spousal support in the bankruptcy process did not apply to the retirement account.