What is the difference between a liquidation and a plan bankruptcy on a Virginia separation or divorce?
There are two different types of bankruptcies, a liquidation and a plan bankruptcy. Each will have different effects on your divorce proceeding. A liquidation, represented by Chapter 7 of the Bankruptcy Code, means that the filing husband or wife has agreed to give up his or her non-exempt property to be liquidated by a trustee. Certain property can be protected from creditors by the husband or wife, or both, under federal and state laws. The protected property is exempt from creditor process and would also be protected from liquidation by the trustee. The Chapter 7 trustee has the power and obligation to administer or sell the non-exempt property and pay the creditors from the proceeds of sale. A trustee can sell jointly owned property and pay the co-owner for his or her interest in the jointly owned property. As answered in the question, “Is my Virginia real estate vulnerable to creditors when I divorce?”, property held by the spouses in a tenancy by the entirety will be exempt while the husband and wife are married provided there are no joint creditors.
The Chapter 7 liquidation will usually last only about four months and the case filing will not delay the granting of a divorce or the determination or collection of support obligations. While the equitable distribution portion of the divorce must wait until after the discharge is granted or the case is closed, a spouse could seek relief from the automatic stay to proceed sooner than the time it takes to administer the bankruptcy estate. Domestic support obligations and debts related to separation and divorce will not be discharged in the Chapter 7 case.
A plan bankruptcy means that the filing husband or wife has agreed to repay part or all of his or her debt through a plan confirmed by the U.S. Bankruptcy Court judge. Chapter 13 is the most frequently filed type of plan bankruptcy. Chapter 11 is a reorganization for businesses or individuals, and Chapter 12 is a plan bankruptcy tailored for family farmers or family fisherman. In Chapter 13 bankruptcy, a husband or wife will repay debts over a three to five year period. The spouse filing bankruptcy can keep his or her property, exempt or not, but must pay the creditors at least as much as they would receive if the husband or wife filed Chapter 7 bankruptcy. This requirement is known as the liquidation test or the best interests of the creditors test: the creditors will not be any worse off because the debtor chose to file a plan bankruptcy instead of a liquidation.
A Chapter 13 case has the potential to have much greater effect on a Virginia divorce than a Chapter 7 case. The Chapter 13 case may last up to five years and a spouse may want to seek relief from the automatic stay to continue the equitable distribution portion of the Virginia divorce. Actions taken in violation of the automatic stay will be void. Domestic support obligations are priority claims that must be paid in full in the Chapter 13 plan. In addition, in order to have a plan confirmed, the debtor must certify that all domestic support obligations coming due after the case was filed are current. Similarly, at the conclusion of the Chapter 13 plan, the debtor must certify that domestic support obligations have been satisfied in order to obtain a Chapter 13 discharge. The Chapter 13 discharge is broader than the Chapter 7 discharge, and can discharge debts to the non-filing husband or wife related to separation and divorce that are not domestic support obligations.
You should consult with your Virginia bankruptcy or divorce lawyer to discuss the different impact of a liquidation or plan bankruptcy on your separation or divorce.